According to today’s flash estimate, the Italian economy retracted by -0.3% in Q4 2019 bringing the annual real growth down to 0.0%. Overall, this is a very disappointing figure as consensus was expecting a slight increase of GDP by 0.1% qoq. Even if the figure might see some later upwards revision, the dynamic remains worrisome. The country still seems to struggle with the combination of declining in foreign demand (particularly evident in the reduction of inventories) and subdued domestic demand as especially with private consumption still affected by political uncertainty.
Given the continuing weak leading indicators especially in the manufacturing sector, a negative quarter in Q1 2020 seems now possible. This would mean a relapse into a technical recession. However, in 2020, we are confident that the negative impact of political uncertainty on growth will ease. The risk of snap elections has been reduced after the recent regional elections, giving a victory for the ruling Social Democrats in the important region of Emilia Romagna. There are also no signs that the government seeks to deviate from its conciliatory course with Brussels on the budget. In this environment we expect a moderate acceleration of Italian growth to 0.4% in real terms in 2020. For 2021, we expect real growth to reach 0.8% Italy should thus remain below the euro area (1.0% in 2020 and 1.2% in 2021), but the growth gap should narrow.