Italy

Elevated political uncertainty to weigh on domestic demand

A2

MEDIUM RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD1934.798bn (World ranking 9, World Bank 2017)
Population 60.55mn (World ranking 23, World Bank 2017)
Form of state Republic
Head of government Giuseppe Conte (PM)
Next elections 2023, legislative
  • Well-diversified export sector
  • Strong manufacturing base
  • Low private debt burden
  • Primary fiscal surplus
  • Strong domestic investor base for public debt
  • Elevated policy uncertainty
  • High public debt burden
  • Fragile banking sector
  • Rigid business environment
  • Low R&D expenditure

Italy: Dim growth outlook

For 2019, Italy is on course to raking in its worst GDP growth reading since 2014. After losing momentum over the course of 2018, thanks to the wider Eurozone slowdown, as well as elevated domestic policy uncertainty, the Italian economy slipped into recession in H2 2018 – the third one since 2008. Worryingly, the economy has yet to recover to pre-crisis levels with 2018 GDP still 4% below the 2007 level. Going forward, Italian GDP looks set to expand by a meagre +0.2% this year and 0.4% next year, down from +0.8% in 2018. While positive support from the external sector should strengthen in the months to come , thanks to the Chinese stimulus propping up export demand, Italian domestic demand should remain muted at best.  After all, budget tensions between Italy and the EU are likely to flare up again in the coming quarters, which, in turn, will see elevated borrowing costs and subdued economic sentiment weigh on hiring, investment and spending decisions in the private sector. As a result of the rather dim growth outlook, the favorable labor market trend has already come to a standstill and the unemployment rate looks set to embark on a gradual upward trend over the forecast horizon. Similarly, the number of insolvencies will rise again for the first time since 2014 - by 2% in 2019 and 5% in 2020 - as a result of the deteriorating economic outlook.

Fiscal outlook: Public debt returns on upward trajectory

The budget deal struck between the EU and Italy in December 2019 to tone down the latter’s spending plans helped avoid a further escalation of the political stand-off. In exchange for lowering its budget deficit target from 2.4% to 2.04% of GDP – largely by postponing the financing of key election promises to 2020/21 – Italy narrowly avoided the initiation of an Excessive Deficit Procedure. However, weaker economic growth coupled with unrealistic revenue targets will see the Italian budget deficit register just below 3% of GDP and the debt-to-GDP ratio rise to 133%. By autumn 2019 at the latest, the EU is likely to call on Italy again to correct its fiscal policy as part of its budget planning round for 2020. Rising spreads and the lingering threat of a sovereign rating cut will highlight the necessity of fiscal tightening to reign in public finances. However, given the expected inability of government coalition partners to agree on unpopular fiscal-saving measures, there is a rising probability of fresh elections to take place before year-end.

Banks receive a helping hand from the ECB

The weak growth outlook will weigh on Italy’s still fragile banking sector. The progress in reducing the high burden of non-performing loans is likely to lose momentum. Moreover, fading confidence, a deteriorating growth outlook and rising pressure on banks, thanks to the sovereign-bank doom loop, are pushing up the risk of a credit crunch in Italy. In this context, the ECB’s more dovish forward guidance, as well as its helping hand to Eurozone banks in the form of another TLTRO financing round, is good news for Italy. A delay in ECB monetary policy normalization by at least another year will soften concerns about the sustainability of Italian government debt and support demand for Italian government bonds as investors will continue their search for yield. Meanwhile, cheap ECB loans will help keep lending conditions favorable in Italy. After all, Italian banks are very reliant on ECB financing, taking up around 35% of the last financing round (TLTRO II). 

Trade structure by destination/origin

(% of total)

Exports Rank Imports
Germany 12%
1
16% Germany
France 10%
2
9% France
United States 9%
3
7% China
United Kingdom 5%
4
6% Belgium
Spain 5%
5
6% Netherlands

Trade structure by product

(% of total)

Exports Rank Imports
Other industrial machinery and parts 10%
1
11% Road vehicles
Road vehicles 8%
2
6% Petroleum, petroleum products and related materials
Specialised machinery 6%
3
6% Medicinal and pharmaceutical products
Medicinal and pharmaceutical products 5%
4
5% Electrical machinery, apparatus and appliances, n.e.s.
Articles of apparel & clothing accessories 5%
5
4% Other industrial machinery and parts

The payment behavior of domestic companies is poor and the average DSO is excessive, even though the regulations on late payments are more constraining than the applicable EU rules.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Procedural delays and costs are high whilst enforcing court decisions may prove to be a real challenge. Thus, commencing legal action without first establishing a pre-legal collection strategy is unreasonable.

When the debtor is insolvent, debt renegotiation mechanisms have been put into place but they remain mostly unused in practice. Liquidation (bankruptcy) therefore remains the default route, but leaves limited opportunities for unsecured creditors to recover their debt.

Download the entire collection complexity PDF:

Collection complexity Italy

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Contact

Euler Hermes

Economic Research Team

research@eulerhermes.com

Katharina Utermöhl

Country Risk Analyst

katharina.utermoehl@allianz.com

 

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