A Pre-Election Primer on the Italian Economy

Executive Summary

Real GDP in Italy is finally growing again at a solid rate, but the economy remains more or less depressed with the unemployment rate elevated and economic output still 6 percent below its 2008 peak. Italy must hold a general election by May 20, and the populist/antiestablishment/ Eurosceptic message of the Five Star Movement (5SM) has resonated with some voters. A date has not yet been set for the election, but polls show that the 5SM would do well if the election were held today.

We have written this primer on the current state of the Italian economy to give readers a prism through which to view some of the issues that confront voters in Italy. We are not predicting that a victory by the 5SM in the Italian election, should that occur, will necessarily lead to "Italexit." However, readers should be prepared for potential financial market volatility if the 5SM were to win a plurality, let alone a majority, of seats in the upcoming election.

Despite Decent Growth Recently, the Economy Remains Depressed

The last general election in Italy was held in February 2013. The tenure of the parliament that was seated after that election ends on March 15, 2018, and the next general election must be held by no later than May 20, 2018. Although a date has not yet been set for the next election, it obviously needs to occur in the next few months. We are writing this primer on the current state of the Italian economy to give readers a prism through which to view some of the issues that confront voters in Italy.

For starters, an economic recovery is underway in Italy. On a sequential basis, real GDP growth has been positive for 13 consecutive quarters. On a year-ago basis real GDP was up 1.8 percent in Q3-2017, the strongest growth rate in more than six years (Figure 1). Real GDP growth in Italy is more or less back to the run-rate that was registered in the years leading up to the global financial crisis. That said, the extraordinarily low rate of inflation—CPI inflation averaged only 0.1 percent per annum between 2014 and 2016—means that growth in nominal GDP is still slow relative to the standards of the past decade.1

This lack of inflation suggests that the economy is operating well below potential. Indeed, the level of real GDP in Q3-2017 remained about 6 percent below its Q1-2008 peak. The Italian economy fell into a deep hole during the Great Recession, and the pain was compounded in 2011 through 2013 by the European sovereign debt crisis. At its depth in early 2013, the Italian economy was nearly 10 percent smaller than it had been five years earlier. The economy has been growing continuously since mid-2014, but it has not yet emerged from the deep hole into which it fell. In short, the Italian economy remains depressed today.

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