Italy: Economic and fiscal data will regain relevance from Monday - ING

Paolo Pizzoli, Senior Economist, estimates that recent upbeat data from Italy is unlikely to affect Sunday’s election. He warns that from Monday, as negotiations to form a government kick off, the economy will become a significant theme in political debate, with a particular focus on fiscal promises.

Key Quotes: 

“The recent set of Italian economic data releases point to a continuation of the ongoing economic recovery. Earlier today, Istat released the complete set of GDP data for 4Q17, which confirmed that the Italian economy has expanded by 0.3% QoQ (1.6% YoY) in 4Q17. The main focus of the release was the detailed demand breakdown, which broadly confirmed our expectations.”

“Recent economic and fiscal data should not swing the vote but will regain relevance from Monday. The set of data released today is unlikely to tilt the balance of votes in Sunday's elections. It represents food for thought from Monday onwards, when economic themes will re-gain relevance in the negotiations to form a new government. We expect the labour market theme to take centre stage here, as recent trends in employment creation have been dominated by unpopular fixed-term contracts over the open-ended format.”

“Even more crucially, the post-vote political debate will have to re-focus on fiscal issues. Istat data released yesterday on 2017 annual aggregates was rather comforting: Italy posted a lower than expected 1.9% headline deficit/GDP, which built on a bigger than expected primary surplus of 1.9% of GDP (from 1.5% in 2016). Together with a declining interest rate bill, this helped to bring the debt/GDP ratio down to 131.5% (from 132% in 2016). According to our calculations, the 0.5% decline should be enough to prompt Eurostat to classify as public debt some of the public money put in compulsory administrative liquidation from the two Venetian banks Veneto Banca and Banca Popolare di Vicenza.”

“The decline in the debt/GDP ratio should be safely in the bag and will likely be a key starting point for any future discussion on the Italian fiscal policy stance. After a vocal campaign with eye-catching tax-cut promises, observers will be keenly monitoring whether and how these can be matched with the hard reality of internal and external constraints. The chances of Italy playing any role in the construction of a new European governance will also depend on how its fiscal dilemma will be resolved.”