Italy: Moving in the right direction – albeit at a snail’s pace

Country Report

Economic momentum accelerating at last

In 2016 Italian GDP grew by 0.9%. Domestic demand – supported by favorable financing conditions, tax incentives aimed at boosting business investment and solid employment growth – was the main driver of economic growth. Meanwhile the growth contribution from net exports was negative with exports decelerating more than imports in the context of subdued global trade dynamics. The Italian economy has yet to recover to pre-crisis levels with 2016 GDP still 7% below the 2007 level.

For 2017 the outlook seems more promising: We forecast Italian GDP growth to accelerate to 1.2% –surpassing the 1% mark for the first time since the weak economic recovery started in mid-2013. In that context, the growth reading for the first quarter of 2017 is encouraging with economic activity expanding by 0.4% q/q – the highest quarterly growth rate in six years. In the coming months private consumption will not accelerate further in light of rising inflation (forecast: 1.4% in both 2017 and 2018) mitigated only to some extent by the positive – albeit weak – labor market trend. Investment meanwhile should expand further given improving growth prospects and still favorable financing conditions. Meanwhile Italian exports are set to benefit from the brighter growth outlook for key export markets, particularly in the eurozone, and a slightly lower EUR. In March 2017, the value of Italian goods exported rose more than 12% y/y, the highest rate since 2011. In 2018 Italian GDP growth will moderate to 1.0% in line with slowing economic momentum in the eurozone following the peak of the cyclical recovery. 

Despite declining for the second consecutive year to 11.6% in 2016, Italy’s unemployment rate still stood 5.6 ppts above the 2007 pre-crisis low. Going forward unemployment will continue to decline gradually remaining firmly above 11% over the forecast horizon. Following two years of strong gains driven by temporary reductions in social contributions employment growth will continue to accelerate but at a more gradual pace.