Italy’s economy after the referendum: Now what?

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​In the wake of the resounding “no” vote to constitutional reform our latest study of the Italian referendum’s impact on the economy analyses why the results do not warrant panic.
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In 2017, political uncertainty can cause a mild confidence crisis. If there are no spillovers to banks or the bond market as the baseline scenario suggests, the downturn may shave off -0.3pp of Italian GDP. In this case, the economy should grow by a mere +0.6% (see chart below).
It is reasonable to assume that a knee-jerk reaction is inevitable. But a 2011-12 style financial stress, which would cost -0.7pp in GDP growth and push Italy close to zero growth (+0.2%), should be avoided. This time around Italy benefits from stopgaps, courtesy of Europe, such as the ECB’s QE program and the ESM 2.0. Add to that the country’s structural strengths: fiscal surplus and debt ring fencing. The Italian banking sector should feel the pinch.
Italian companies will bear the brunt of a confidence shock, albeit mild. Slight divestment from abroad and tougher financing conditions mean that investment will stay flat. +2% growth was previously expected for 2017 but reality on the ground, it seems, will diverge from previous forecasts.

The impact of confidence crisis on Italian GDP growth

Sources: IHS, policyuncertainty .com, Euler Hermes estimates

 

Ludovic Subran

Chief Economist

Euler Hermes