Italy, third recession in 10 years: the 5 reasons for concern

Italy has entered a recession. The third in ten years. Of course, for now it is a minimum negative change in GDP: -0,3% cumulative between the second quarter and the last 2018. Technique, they say, a sweetening adjective as well as analytically precise, because two consecutive quarters of decline in the GDP, whatever their size, in order to correctly speak of a recession. The result of the last part of last year is even marginally lower than expected (-0,1%).

There are five significant elements which make even this minimal reduction even more worrying. The first is that looking at the qualitative indicators (business confidence in January and PMI in December) they continued to drop, a sign that we must expect at least another minus sign in 2019. The second is that a flurry of leaves in the international cycle that Italy is going under water and the unfavorable gap of around one percentage point of annual growth between the Euro area and Italy observed since 2000 is confirmed (1,2% against 0,1% trend in the last quarter of 2018), which means that the country continues to lose ground compared to its European partners. Which refers to purely internal causes to explain the low growth in Italy.

The third element is that the mini recovery that started in the second half of 2013 has only made up for a small part of the losses accumulated from 2008 onwards and that in terms of GDP per capita, the levels are those of ten years ago, and this fuels the perception that there has been no recovery, with the social and political consequences that are observed in terms of a further increase in absolute poverty and the political orientation of the electorate, which seeks immediate refreshment and protection. The fourth element is that this negative change in the second half of 2018 drags on into 2019, which in fact starts from -0,2%. Using a football metaphor, it is as if a football team were penalized by a few points at the start of the championship, with the consequence that they have to work harder to climb back up the table.

Chasing reality worse than expectations, continuous downward revisions have been observed for some months, whatever the forecaster. The latest in chronological order was REF searches, which gave a nice round zero for this year's GDP dynamics. But, considering the quarterly profile incorporated by REF, and with the same trend for the remaining part of 2019, it already makes that estimate old and optimistic, because the whole of 2019 would now close at -0,1.

The REF profile, in fact, estimates another -0,1% in the first quarter and then minimal growth in the rest of the year. But this trend is by no means obvious, because important downside risks persist, the same ones that caused the global economy to slow down during 2018: the American slowdown could be greater and the same is true for China and in both the economic policy ammunition to counteract the slowdown is not as abundant as before the crisis; the uncertainty about the next moves of the major central banks, which in one way or another have become dependent on the data that gradually comes out; the trade war unleashed by the Trump Administration, which still does not know where it will stop; Brexit, which at this point looks like it will be increasingly harsh and ungoverned; the results of the European elections; the performance of the financial markets, which have already recorded a significant decline in the last few months of 2018 but which do not discount global growth lower than the current IMF and OECD estimates and which could affect, with another tumble, the confidence and wealth of the families. In short, there is still a lot of political risk that hangs over the Italian economy like a pall. This risk is even higher in Italy, as demonstrated by the trend of the spread, which has decreased, but remains very high and makes it more difficult to grant credit.

Among other things, both REF and the Bank of Italy (which indicated a +0,6% for this year) already incorporate the effects of the measures adopted with the latest budget manoeuvre. Measures that do not help growth, concentrated as they are on increasing transfers to households, which are increasing, given the moonlight, the propensity to save (even at historic lows). If even a fraction of these downside risks materialise, the upturn in the second half of the year cannot be taken for granted.

Ma why did the growth of the Italian economy collapse so rapidly? Because the driving force was given by exports on the demand side and by industry on the supply side. Industry which is decisive for the economic cycle because it is more subject to fluctuations; while exports are affected by the state of health of world demand and in particular of the country's reference markets, both geographic and sectoral. Italy still exports a lot to the euro area and in particular to Germany; and sells many capital goods and components of such goods abroad. The worsening of the European and above all German economic situation, on the one hand, and the rapid slowing down of the investment cycle (linked to the above uncertainty) have penalized exports and industry and caused Italy's speed to deflate.

The last item of concern it is also the biggest one for Italy, and are the repercussions on public finances of a similar GDP dynamic. Indeed, the Government has based its projections on public deficits and debt on real growth of 1% and a price trend (GDP deflator) of 1,4%, i.e. nominal GDP, which is what counts for the performance of the public finances, of 2,4%. All things considered, the public deficit this year could be in line with government forecasts: REF indicates 2,1% (against 2,0%) due to a presumable delay in the implementation of the citizen's income and quota 100 for pensions. But already in 2020 it rises to 2,3% (instead of 1,8%), this by virtue of a partial deactivation of the safeguard clauses (substantial increase in VAT). Above all, the debt to GDP ratio is starting to rise again this year and stands at 132,9% of GDP next year, while the Government has indicated 129,2% and constantly decreasing.

This represents a clear violation of the European rules, which foresee a substantial drop in the debt/GDP ratio as we approach the 60% threshold. Now, regardless of the logic and intelligence of these rules, the majority that supports the government is aiming for European electoral results that reward nationalistic and therefore anti-Brussels parties. It's a pity that in the centre-northeast nations the nationalist parties are in favor of tidy public finances and they are much more dogmatic and rigid than those who currently govern, for example, France and Germany. Therefore, the gamble of the Italian rulers risks turning out to be a loser and Italy ending up with a public finance crisis similar to that of 2011-12. Fasten your seat belts.