Italy: GDP growth marginally loses steam in Q4; full-year growth accelerates from 2016
Economic growth was broadly unchanged in the fourth quarter, only decelerating slightly from the third quarter as firms reduced inventories. Growth, which was supported by healthy investment growth and a robust external sector, came in at 0.3% quarter-on-quarter in seasonally- and working-day terms. The reading confirmed the flash estimate and was marginally lower than the 0.4% growth rate recorded in the previous quarter. In Q4, GDP expanded 1.6% compared to the same quarter of the previous year (Q3: +1.7% year-on-year). The result brought full-year growth to 1.5%, notably up from 1.1% in 2016 and the highest reading in seven years.
Quarter-on-quarter growth in Q4 was underpinned by an ongoing recovery in fixed investment. Gross fixed investment continued to increase, rising 1.7% following Q3’s stronger 3.2% growth. Its performance was broad-based, supported by higher investment in equipment, transport and construction. Growth was especially impressive in investment in transport, buttressed by strong momentum in the EU car market. Fixed investment in 2017 benefited from an improved fiscal framework, which was extended by the government to 2018. That said, the highly volatile component of stock variation dragged heavily on the economy. Destocking subtracted 0.4 percentage points from growth, as companies lightened their warehouses.
Private consumption weakened in Q4, rising a meagre 0.1% compared to 0.4% in Q3. Despite some improvement in the labor market, wages continued to stagnate, and households suffered the effects of declining house prices. Government consumption, on the other hand, swung to a 0.1% increase in Q4, from the 0.1% decline in Q3. That said, the pace of growth was subdued overall, as the government struggled to keep public finances under control.
The external sector’s contribution to growth strengthened, however, adding 0.3 points in Q4, up from the 0.1 percentage-point contribution in Q3. Growth in exports of goods and services was again supported by higher overseas orders from both EU and non-EU countries, coming in at 2.0% (Q3: +2.0% quarter-on-quarter). Meanwhile, growth in imports of goods and services was 1.0% (Q3: +1.9% qoq), restrained by weakening domestic demand.
The Italian economy continues to be burdened by long-standing structural problems. These include a rigid labor market, stagnant productivity, high taxes, a troubled banking sector, cumbersome bureaucracy and high public debt. Moreover, the upcoming elections, which will take place on 4 March, are not expected to deliver a strong reformist government. As bold reforms are unlikely to follow, Italy’s growth potential and outlook will remain below that of its European peers.