Italy’s GDP shrinks unexpectedly, a blow to Meloni.

Italy's GDP shrinks unexpectedly, a blow to Meloni.

Italy’s Economy Performs Below Expectations, Casts Shadow on Government’s Goals

Italy’s economy faced a surprising setback in the second quarter, according to recent data released by the national statistics bureau ISTAT. The gross domestic product (GDP) contracted by 0.3% on a quarterly basis between April and June, while only showing a 0.6% year-on-year growth. This underwhelming performance raises concerns for Prime Minister Giorgia Meloni’s government, as they strive to address the negative impact of high inflation.

The economy’s poor showing in the second quarter poses challenges for the government’s goal of achieving a 1% growth rate this year. However, the Treasury remains optimistic, stating that the target is still “fully within reach.” The government intends to continue implementing its EU-funded national post-COVID investment programme and addressing the issue of rising inflation.

A report by Capital Economics, authored by Franziska Palmas, notes that Italy is no longer outpacing its European peers. In fact, the report predicts that Italy will experience a “sharper drop in output than other euro zone majors in the second half of 2023.” This forecast further dampens the outlook for Italy’s economy.

The disappointing figures not only affect the overall economy but also cast a shadow on the banking sector. Last week, the two largest lenders in Italy, Intesa Sanpaolo and UniCredit, reported much stronger earnings than expected. However, these positive results were partly supported by low provisions against loan losses. The sector’s resilience may face challenges as the broader economic conditions weaken.

While ISTAT did not provide a numerical breakdown of the GDP estimate by sector, they highlighted that industry and agriculture output decreased, while services experienced marginal growth. The contraction of 0.3% in the second quarter leaves Italy with a “carryover” growth of 0.8% for the year, assuming GDP remains flat in the remaining two quarters.

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In recent weeks, the government has expressed optimism that the economy could achieve at least 1.2% growth this year. Their argument revolves around the positive trend in the service sector, supported by a thriving tourism industry, which they believe will offset the anticipated slowdown in manufacturing activities. However, some experts, including Lorenzo Codogno, head of LC Macro Advisors and former chief economist at Italy’s Treasury, argue that the weakness in the manufacturing sector is of greater concern for the health of the economy, given Italy’s status as an advanced industrial country.

In addition to the economic challenges, Italy also faces high inflation. ISTAT reported that annual inflation slowed to 6.4% in July from 6.7% in June, based on EU-harmonised consumer prices. Notably, prices for food, household, and personal care items rose by 10.4%, on par with the previous month and over 50% higher than the overall index.

To alleviate the burden on the poorest citizens, the government plans to strike a deal with supermarkets and producers to control the prices of essential consumer goods during the final three months of the year. This initiative aims to provide relief and stability for those facing the impact of rising prices.

The recent economic performance of Italy raises concerns for Prime Minister Giorgia Meloni’s government. With the economy contracting in the second quarter and inflation remaining high, achieving the desired growth rate of 1% becomes more challenging. The government remains committed to implementing its investment programme and addressing inflationary pressures. However, the report from Capital Economics suggests a tougher road ahead for Italy compared to its European counterparts. The banking sector, while currently strong, may face headwinds in the future. With ongoing efforts to control prices and support the most vulnerable, the government aims to mitigate the impact of rising inflation on its citizens.

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