Italian Economic Recovery Far From Robust

Mixed economic data along with political and banking sector risks continue to point that the Italian economy is far from a full recovery. The country continued to underperform most of its Eurozone partners in the first quarter of 2017 as the GDP expanded by 0.4 percent, compared to the bloc's average of 0.5 percent.


May's industrial confidence fell to 106.9 from a near nine-year high of 107.7 in the previous month, amid a deterioration in orders level and production expectations. At the same time, surveys of businesses suggest that the recovery in private sector economic activity is gathering pace, with April's Markit/ADACI Composite PMI hitting a near ten-year high of 56.8, boosted by incoming new work. Business activity in the service sector increased at its fastest rate in almost a decade and manufacturing output grew the most in six years.

Also, Italy has been gaining from a weak euro and stronger-than-expected economic growth in Europe, with exports jumping by 14.5 percent from the previous year to an all-time high of €42.4 billion in March.

Households, labour market and prices

Meanwhile, household opinion surveys point to a weak level of confidence in the economy amid softening jobs growth and subdued earnings increases. Italy's consumer sentiment fell sharply to 105.4 in May, its lowest figure since January 2015, mainly due to a fall in the future climate while concerns about unemployment over the next 12 months increased for the second straight month. In fact Italy’s jobless rate has remained stubbornly high for years and in April it declined by 0.4 p.p. to 11.5 percent, as the number of unemployed fell 3.5 percent from the previous month while the employment level increased 0.4 percent. Youth unemployment rate stood at 34 percent.

Also, Italian retail sales dropped 0.4 percent year-on-year in March after a 0.7 percent decrease in February, pointing to ongoing weakness in Italian domestic demand partly due to rising consumer prices. Inflation picked up to a four-year high of 1.9 percent in April, and core inflation, which excludes volatile items such as energy, unprocessed food and tobacco, rose to 1.1 percent, the highest since the end of 2013. In addition, house prices registered their first annual rise in five years, expanding by 0.1 percent in the last quarter of 2016.

Public finances and banks

Italy debt burden has been steady rising since 2007 and reached a record high of 132.6 percent of GDP in 2016, the second-highest in the Eurozone. On the positive note, the fiscal deficit has shrunk to 2.4 percent of GDP in 2016 from 2015's 2.7 percent, well below the upper limit of 3 percent set by the EU. 

The balance sheets of Italian banks have been benefiting from the economic recovery, which has brought households and firms' default rates down close to pre-crisis levels. Still, banks are exposed to significant risks, as profits remain low. On June 1st, the European Commission announced that it reached an agreement with Italy's government on a rescue of Monte dei Paschi di Siena, the country's oldest bank. Also, Banca Popolare di Vicenza and Veneto Banca have requested for a state bailout, and are waiting for the approval of European authorities.

Joana Ferreira |
6/1/2017 5:51:52 PM