- The risk of early elections now seems contained as Draghi will be heading a government of national unity, comprising technocrats as well as traditional politicians from left, centre-left, centre-right and right parties. However, the new government faces slowing growth momentum: Unlike in most other Eurozone countries, growth in Italy did not surprise on the upside in Q4 2020 (-2.0% q/q, -8.8% for 2020 as a whole) due to lockdown measures and the trend reversal in foreign trade. In Q1 2021, we expect economic output to decline again by -1.25% q/q. Meanwhile, the vaccination progress is currently too slow to allow for a significant easing of restrictions. As in the rest of the EU, Italy has already fallen five weeks behind schedule for its target of vaccinating 70% of the adult population by the summer. In Italy, each week of delay equals EUR2bn in lost output.
- To deal with this situation, Draghi’s leverage will mainly be on the fiscal side. So far, the Italian government has been generous on guarantees but more cautious on stimulus measures (6.5% of GDP), especially when it comes to public spending. According to our (preliminary) growth forecast of +3.3% this year and +3.8% next year, Italy will be one of the last Eurozone countries to reach pre-crisis GDP levels in mid 2023, one year after the Eurozone as a whole. To catch up with its European peers, a fiscal package similar in size to that of 2020 would be necessary to boost GDP growth by at least 2pp this year. No rumors of a new package have leaked out yet, but Draghi will have to position himself here soon (upcoming end of redundancy ban and support for most exposed sectors). In the case of a new package, we expect more weight on the demand side (the previous was equally weighted). This is easier to achieve in a heterogeneous coalition, especially as the supply side should be covered by the national recovery plan.
- Given the tight schedule, we don’t expect major changes in the size and orientation of the national recovery plan. Italy is one the largest beneficiaries of the “Next Generation EU” package, with grants of EUR82bn (5% of GDP). The implementation of the national recovery plan will be essential in getting the economy back on track. However, the last government broke apart over the design of the plan. The current draft includes expenses of EUR310bn over six years (EUR210bn from the EU recovery fund, EUR20bn from other EU programs and EUR80bn from national funds), of which 70% should be allocated to investments.