Italy: Second estimate trims Q1’s rebound
A second estimate released by Italy’s Statistical Institute (ISTAT) on 31 May showed GDP ticked up 0.1% in the first quarter over the previous period in seasonally- and working-day adjusted terms, below the 0.2% expansion reported by the preliminary estimate but still up from the 0.1% contraction recorded in Q4 2018. The Italian economy returned to growth in Q1, after languishing in technical recession in the last two quarters of 2018, supported by the external sector and by a slight increase in domestic demand net of inventories. In year-on-year terms, GDP contracted 0.1% in Q1, down from both the preliminary estimate of a 0.1% year-on-year expansion and the flat reading logged in Q4. It also marked the weakest reading in over five years.
Consumer spending rose just 0.1% in the quarter, marginally down from Q4’s 0.2% rise, stifled by cooling job creation, weakening consumer confidence and muted productivity and wage growth. Government consumption, meanwhile, rebounded 0.2% in Q1, swinging from Q4’s 0.2% contraction, as the government tried to lift growth at the expense of deteriorating fiscal metrics. Gross fixed investment increased a more convincing, albeit far from spectacular, 0.6% in the quarter, matching Q4’s print. The increase was chiefly driven by a healthy increase in both residential and non-residential buildings investment. That said, the scope of the rebound was seriously limited by a notable drop in investment in plant and equipment, especially means of transportation, due to the protracted weakness in the EU’s car sector. On top of that, political instability, high interest rates, interventionist government policies, worsening business confidence and slow credit growth continued to weigh on investment decisions.
All told, domestic demand excluding stocks contributed plus 0.2 percentage points to growth in Q1, mirroring Q4’s result. That said, destocking was the elephant in the room. Stock variation detracted 0.6 percentage points from quarter-on-quarter growth, further down from the previous quarter’s minus 0.4 percentage-point contribution to growth. A worsening general economic performance and a darkening outlook for domestic demand likely prompted companies to discard of accumulated inventories.
The external sector, meanwhile, added 0.5 percentage points to growth in the first quarter. Although this was well above the 0.1 percentage-point contribution recorded in Q4, the improvement came entirely on the back of plunging imports. Imports of goods and services dived 1.5% (Q4: +1.3% quarter-on-quarter), depressed by the unremarkable recovery in domestic demand and destocking, while the exports of goods and services lost considerable steam (Q1: +0.2% qoq; Q4: +1.4% qoq).
Withering domestic demand will weigh on the economy in 2019. Muted productivity gains and lethargic job creation due to less flexible recruitment rules will hit private consumption, while political uncertainty, a less favorable tax regime and anemic credit growth will hamper capital spending. On top of that, long-standing problems weigh on Italy’s outlook, including a mountainous debt-to-GDP ratio, a slow judicial system, high taxes and cumbersome bureaucracy. Consequently, FocusEconomics panelists project the economy to grow just 0.1% in 2019, which is unchanged from last month’s projection, and 0.6% in 2020. Downside risks stem from uncertainties surrounding the government’s stability and continuous clashes with the European Commission over the direction of its economic program. The resurgence of financial turbulence, coupled with the country’s sizeable fiscal deficit and fragile banking system, also cloud the outlook.