Italy in recession – budget plans vanish into thin air

In the second half of 2018 the Italian economy slid into recession owing to the economic downturn in Euroland and the generally slower global economy. After negative growth of 0.1% in Q3 (on the prior quarter), between October and December the Italian economy shed a further 0.1%. For 2018 as a whole, economic growth on the prior year ran at 0.8%.

Compared to the other Eurozone member states, Italy’s economic performance remains below average. In the previous upturn phase, growth in Italy lagged behind the EMU average, and it is, moreover, the only country in the EMU to be in recession. A glance at the economic indicators that have been published suggests that the phase of acute weakness is likely to persist for a while.

In the current first quarter we do not expect the country to return to growth. On balance, annual growth for 2019 looks set to be only 0.2%. In other words, the figure will fall far short of the government’s actual growth target of 1.0%.

The compromise agreed with the European Commission in December 2018, which limits new debt to “2.04%” of GDP, is vanishing into thin air in light of such economic figures. We now expect the budget deficit to reach 2.8% of GDP in the current year, and 2.9% in the coming year. For this reason, the mountain of government debt as a ratio of economic output will rise to just short of 133% by 2020. In other words, there can be no talk of consolidation whatsoever. Furthermore, a continuation of the conflict between the Italian government and the European Commission is inevitable in such circumstances.

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