The EU fund could help, both in the short and long run, and both in terms of the grants provided to Italy and the signaling effect of such a big step forward in EU fiscal coherence.
The Italian economy is facing one of its darkest hours in modern history. After shrinking by 5.4% y-o-y in the first quarter, it is set for a much larger contraction in Q2. In April, arrivals at tourist accommodations were down 99% compared to last year, car sales contracted by 98% y-o-y, retail sales by 29%, industrial production with 47% and construction production by 68%. And while scarcely available data suggests that May and June have been less bad –which makes sense as non-essential production sites and stores were allowed to reopen, albeit with restrictions. Industrial production shrank by 31% compared to the same quarter last year and car sales by 57%.
In April, arrivals at tourist accommodations were down 99% compared to last year, car sales contracted by 98% y-o-y, retail sales by 29%, industrial production with 47% and construction production by 68%.
Starting from the second half of this year, there is room for a ‘technical’ recovery. The simple fact that stores and restaurants have reopened, and people are again able to spend as opposed to being confined to their homes, for example, will lead to more spending. Moreover, the fact that since 3 June, the country again welcomes foreign tourists from the EU, Schengen and the UK, is likely to lead to at least some tourist inflow, as opposed to close to zero during the largest part of the spring. But many factors, related to both demand and supply side shocks are holding back the recovery .
All in all, we project the economy to contract by 11.5% this year and to grow by 7% next year. Many people believe the economy will not have recovered losses before 2025, the end of our forecast horizon. This forecast is based on the assumption that a COVID-19 vaccine will not be available before the second half of next year, implying social distancing rules will remain in place until then.
Room for recovery
The Italian economy will likely grow rapidly in the third quarter. Yet if we look passed this so-called technical recovery, the Italian recovery faces many hurdles.
While many containment measures have been lifted, social distancing rules continue to persist. This has an impact on a broad range of activities, for example in the hospitality sector. We have estimated that about 17% of Italian jobs cannot be done from home or while maintaining a 6 foot distance. Moreover, even when on paper jobs can be done from home, weak digital advancement hampers that possibility, at least partially. Second, despite that the country is again welcoming desperately needed tourism, international tourism is expected to remain muted. Which is very troublesome for the economy, given that half of its tourists are foreign , the high season is coming and tourism contributes to 13% of GDP . Third the major contraction in the first half of this year brings along a large domestic demand shock despite large fiscal support measures. So far, the government has approved fiscal support packages worth around EUR80 billion (4.6% of GDP), including health care investment, short-time work-schemes, income transfers, tax deferrals, and moratoriums on loan repayments and utility bills. On top of this, the government is issuing guarantees on loans to a broad range of businesses covering at maximum between EUR700 and EUR750 billion loans. According to the European Commission, the contingent liability for the government arising from these guarantees would, at maximum, be EUR430 billion euro.
The EU recovery fund could help, both in the short and long run, and both in terms of the grants provided to Italy and the signaling effect of such a big step forward in EU fiscal coherence.
The recovery fund
The EU recovery fund could help, both in the short and long run, and both in terms of the grants provided to Italy and the signaling effect of such a big step forward in EU fiscal coherence. The latter could help to suppress bond yields. Based on the proposal and a suggested distribution key, the European Commission has forecasted the fund could raise the EU27 GDP level with 1.5-2.25% by 2024, depending on assumptions made on the take-up rate for the loans. For the country group that includes Italy, the estimate ranges from 2.8% to 4.2%.