Italy: Heading towards uncertainty – Natixis

Alan Lemangnen, Research Analyst at Natixis, points out that Italian growth came in at 0.9% in 2016, a slight acceleration from 2015, despite an intense political agenda and the problems encountered by the banking sector.

Key Quotes

“While activity was mainly driven by household consumption in 2015, investment contributed almost half of growth in 2016. It was up 4% in year-on-year terms in the fourth quarter, driven by productive investment which surged 7%. Nevertheless, supply is still struggling to meet demand and imports remained vigorous. As exports were stagnant in 2016, foreign trade therefore prevented growth from really taking off.”

“We expect a slowdown in activity to 0.6% and 0.5% in 2017/18, below consensus expectations. The rise in oil prices and the lack of vigour of global trade will be the main drags on activity. In terms of its components, growth will be more intensive in investment and less so in consumption, in line with what was seen last year.”

“Household purchasing power will suffer from the return of inflation, which has been zero over the last two years. Inflation should bounce to 1.7% on average in 2017 before falling back to 1.3% in 2018. In the absence of an acceleration in wages compared with 2016 (the unemployment rate will remain higher than 11%) (The Jobs Act one year later), the rise in real household income should therefore grind to a halt in 2017, before picking up slightly in 2018. Household consumption is, consequently, likely to slow down sharply over our forecast horizon.” 

“In contrast, productive investment should remain vigorous. As productivity gains will remain zero and per capita wages will rise 1%, profit margins will remain under pressure and unit labour costs will continue to rise. Nevertheless, the improvement in companies’ profitability in the last few years (thanks to the decline in their debt servicing) should enable them to finance investment, itself stimulated by three factors: the low real interest rates, the government’s incentive policy (140% additional depreciation on capital goods spending) and the need to renew ageing capital.”

“Fiscal policy will probably remain expansionary. The return to structural balance of public finances has been postponed by one year (to 2019), which will generate a stimulus of 0.5% of GDP in 2017, reflected in our public consumption forecasts.”

“All in all, domestic demand will slow down only very slightly in 2017/18, which ought to stimulate imports (which are more sensitive to investment than to consumption), while supply remains restricted overall. Given that the upswing in global trade remains uncertain, the contribution of external demand to growth is therefore likely to remain negative over our forecast horizon.”