In the second quarter, GDP in Italy expanded 0.2% over the previous quarter in seasonally- and working-day adjusted terms, according to an advance estimate released by the National Statistics Office (ISTAT) on 31 July.
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The result marked the sixteenth consecutive quarter of growth and matched analysts’ expectations. Despite this, growth slowed from Q1’s 0.3% quarter-on-quarter increase and marked the weakest expansion in two years. According to the accompanying press release, the expansion in Q2 was driven by growth in the services and industrial sectors.
The agricultural sector, meanwhile, contracted. In annual terms, GDP grew 1.1% in Q2, down from the first quarter’s 1.4% expansion and the lowest reading in one-and-a-half years.
Readings for manufacturing PMI, along with business and consumer confidence on average, were lower in Q2 compared to Q1. This was likely affected by a loss of economic momentum in the whole Eurozone and by protracted domestic political instability.
The performance of the external sector also suffered from weaker demand from the EU. Further reductions in the stock of non-performing loans and the firming up of credit growth to firms, however, partly cushioned the slowdown.
On the demand side, preliminary data indicated that while domestic demand including stock variation contributed to economic growth, external demand dragged on it. More detailed national accounts data will be released on 31 August.
The recovery is set to continue this year, albeit at a slower pace. Despite contracting in the first quarter, fixed investment is seen expanding, supported by a strengthening banking system.
Moreover, continued—but again slowing—job creation should underpin household spending. However, long-standing problems continue to weigh on Italy’s outlook, including: the second-highest public debt-to-GDP ratio in the European Union, sluggish productivity growth, a slow judicial system, high taxes and cumbersome bureaucracy.
Moreover, downside risks stem from uncertainties surrounding the government’s stability and the direction of its economic program, while the bulky public debt poses financial risks.
FocusEconomics Consensus Forecast panelists see the economy growing 1.3% in 2018, which is unchanged from last month’s forecast. For 2019, panelists expect economic growth to decelerate modestly, to 1.2%. ■