Italy: Ready to take off or past the peak already? - HSBC

Italy's GDP rose 0.4% q-o-q in Q2 2017 and is just the third time since 2000 that GDP has risen by 0.4% or more for three consecutive quarters, notes Fabio Balboni European Economist at HSBC.

Key Quotes

“We believe the sizeable output gap justifies above potential growth – the unemployment rate is still 3pp above the pre-crisis average (2000-07) and investment is 20% below in real terms – but we see good reasons not to get too carried away.” 

“One is private consumption, which has already slowed a little since the growth rates seen in 2015 (2% y-o-y) to 1.3% y-o-y in Q2 2017. The combination of low wage growth (contractual wages grew by an all-time low of 0.3% y-o-y in June) and rising inflation (1.5% y-o-y in August from around zero on average between 2014 and 2016) is eroding households' real incomes. Employment growth has gained a bit of speed recently, but it does not seem enough to support a pick-up of private consumption growth from the current rate. Consumer confidence, despite the recent rises, remains well below the highs reached at the beginning of last year. Also given the political uncertainty ahead, we do not think it will be the time for households to start saving less.” 

“The second reason is the external sector, which so far has been a key driver of the recovery – exports of goods and services were up 4.7% y-o-y in real terms Q2 2017. Industrial production was also up 4.4% y-o-y in July. However, we see a risk that the export performance might slow in the second half of the year and even more in 2018, due to a possible cooling off of the global trade cycle and the impact of the stronger euro. The stronger currency which might affect Italian exporters more than elsewhere in the eurozone due to Italy's high share of exports outside the eurozone (60%) and relative specialisation in more price-sensitive low-tech goods.”  

“A third reason is the weakness of credit growth, with bottlenecks to credit supply remaining despite falling NPLs and the recent government interventions to rescue Monte dei Paschi di Siena, Veneto Banca and Banco Popolare di Vicenza. We expect the fiscal stance to be broadly neutral in 2018, and mildly contractionary in 2019, given sovereign bond spreads could widen due to QE tapering and in turn erode some fiscal space. EU's fiscal rules also could bite more. Against this background, we have raised our GDP growth forecast for 2017, from 1.2% to 1.4%, but we see a slowdown from now on, to 1.3% in 2018 and 1.2% 2019, partly due the strong euro.”