Italy growth forecast slashed amid fears it fell into recession

THE Bank of Italy has cut its growth forecast for this year and next while signalling that the euro region’s third-biggest economy might have slipped into a new recession at the end of 2018.

The economy is seen expanding 0.6pc this year and 0.9pc next, down from prior projections of 1pc and 1.1pc respectively, the central bank said Friday in its quarterly economic bulletin.

“New data have been published on international trade, economic activity and business sentiment in Italy and the euro area that generally indicate a less favourable development in the global and Italian economy,” the report also said.

Italy has been struggling to break out of a years-long trap of economic stagnation, though the European Commission projects the country will have the slowest growth rate in the 19-nation euro area this year and next. The populist government is counting on its expansive budget and programmes to spur economic growth.

Italy’s bonds reduced gains after the release of the central bank’s report, with the 10-year yield rising to 2.76pc. That pushed the spread or difference with equivalent German bunds to about 250 basis points. That is approximately 75 basis points below a November peak. The revised outlook shows a marked reduction of the estimated investments this year to a 0.6pc rise from a 2.1pc increase previously forecast.

The projection for household consumption’s rise in 2019 was also cut to 0.6pc from a 1pc increase prior. The central bank said that economy may have shrunk at the end of last year, de facto signalling that the nation slipped into recession, after a 0.1pc contraction in the third quarter.

“The Bank of Italy’s forecasting models indicate that in the fourth quarter of 2018, Italy’s GDP may have fallen further, following the slight decline recorded in the three previous months.” That “could negatively affect borrowing conditions and the confidence of households and firms and, hence, economic activity.”

In its December revised budgetary plan, the Italian government said it expected the economy to grow in the fourth quarter, offsetting the decline recorded in the previous three months.

“The recession risks highlighted by the Bank of Italy in today’s note refer to 2018 and the prebudget period,” said Claudio Borghi, head of the budget committee in Italy’s lower house and economic affairs spokesman for coalition partner the League. Those risks “confirm the need for an expansive budget law,” the eurosceptic lawmaker added. The budget law was approved by parliament in December. Last Thursday, the government led by Prime Minister Giuseppe Conte passed the decrees implementing a new income-support tool and earlier retirement age, two key measures for which funds were allocated in the budget.

Earlier last week, a survey conducted by the Rome-based central bank showed that Italian businesses grew pessimistic about growth in the final months of 2018 and that their views of the general economic situation worsened markedly in all sectors. In its bulletin last Friday, the Bank of Italy added that the risks to the nation’s growth are tilted to the downside. “At the national level, renewed increases in interest rates on government bonds and a faster transmission of current rates to private sector borrowing conditions or a sharper drop in firms’ propensity to invest would negatively affect GDP growth. On the other hand, the growth rate might actually exceed this projected scenario in the medium term if sovereign spreads diminish further.” Italy’s national statistics bureau Istat will release its preliminary estimate for gross domestic product for the fourth quarter on January 31.