Italy’s economy remains fragile despite recent stabilisation, Societe Generale

The Italian economy remains mired in deep recession with GDP having contracted consistently since the second half of 2011, and despite the Government’s commitment to balance the budget next year in structural terms, Italy’s situation remains fragile, Societe Generale warned today in a report.

According the bank’s economist James Nixon, weaker growth could easily undermine next year’s budget targets requiring additional austerity.

“Despite a fairly torrid first half of the year that saw the economy decline as much in six months as the Government forecast for the year as a whole, the third quarter has offered Italy some respite. At 10.8%, unemployment rose to the highest in 13 years in September. However the 27,000 increase in the third quarter was the smallest rise in over a year and potentially reflects some stabilisation in growth in the third quarter,” he said.

But the situation could be on the mend. “While still pointing to another contraction, our Italian Q3 GDP indicator points to a more modest 0.3% decline in GDP over the next quarter, significantly more modest than the 0.8% declines recorded in the first and second quarters,” Nixon added.

There are, however, indicators to believe that stabilisation may be fragile.

While the survey indicators have stopped falling, Societe Generale pointed out that domestic demand remains extremely weak.

“Offsetting the strength in industrial production, for example, new car registrations are down 11.2% in the third quarter while the most recent bank lending survey points to a renewed tightening in credit standards for businesses in the fourth quarter,” the bank said.

Ultimately the outlook will depend on the credibility of the Government’s adjustment program.

This improvement largely reflected the positive impact on sentiment that followed the ECB’s announcement that it would be prepared to conduct Outright Monetary Transactions to support a sovereign that made a formal request for assistance

“Certainly, Italian 10 year bond yields have fallen back and are currently trading at just under 5%, down a full 2% from their peak in the summer. The immediate sense of crisis has therefore lifted giving way to hopes that the economic situation might be stabilising,” Nixon said.

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