Italy: Two Years to Transform

Italy two years to transform

· Italy is estimated to grow by +1.4% in 2018 and +1.2% in 2019 i.e. two more years above potential

· Though uncertainties remain regarding the reforms agenda, markets see Italy as pivotal to Europe’s regeneration

On March 4, 2018, Italy’s General Elections proved inconclusive. While talks for a coalition  government are in the making, investors will continue to look for reassuring pro-business reforms, just like the ones implemented by  Prime Ministers Monti, Letta, Renzi and Gentiloni.

Although uncertainties about the reforms lingered, the lid on Italian growth and confidence was lifted and the  economic stars aligned for Italy.

There are two more years of above-potential growth for Italy.

In 2017, Italy grew by +1.5%, its best growth figure since 2010 and a noticeable acceleration from previous years. The broader cyclical upswing in Europe (see Figure 1), the rebound in trade, and good monetary and financial conditions explain this increase in performance.

Yet, Italy also planted the seeds of success with decisive reforms brought about at the onset of the European crisis and covered many policy areas ranging from product and labor markets to taxation, public administration and civil justice (see Figure 2).

Private sector investment growth has finally started to pick up in H2 2017, boosted by the Enterprise 4.0 plan that included tax incentives for businesses investing in new technologies. Additionally, the favorable labor market trend facilitated by the Jobs Act managed to bring down the unemployment rate to its lowest level since 2012.

Going forward, we expect Italy to have two more years of positive cyclical momentum with a GDP growth expected at +1.4% in 2018 and +1.2% in 2019, mainly driven by private consumption (+1.0%) and investment (+4.4%); export growth will remain high (+4.4% in real terms).

The expected continuation of the Euroboom in 2018 (GDP in the Eurozone should expand to around +2% in 2018, for the fourth consecutive year), together with the ECB’s very gradual normalization of its monetary policy, will continue to act as a safety net for investor sentiment.

Figure 1 Manufacturing PMI sub-indices (12-month average)

Italy