Global Insight Perspective | |
Significance | In the third quarter of 2008, the economy recorded a quarterly contraction, signalling that Italy is now in recession. |
Implications | IHS Global Insight expects real GDP growth to be below zero in the next few quarters, with activity curtailed by plunging business and consumer confidence in the wake of recent financial crisis. |
Outlook | Italian GDP is expected to contract by 0.2% in 2008 and 1.2% in 2009. Italy is likely to endure a deep and prolonged full–year recession in 2009. |
Italy Now in Recession
The Italian economy shrank in the third quarter of 2008, according to a final estimate from the statistics bureau (ISTAT). Real GDP contracted 0.5% quarter-on-quarter (q/q) after a 0.3% q/q fall in the second quarter and a 0.5% q/q rise in the first. In addition, the annual comparison also paints a bleak picture, with real GDP falling by 0.9% y/y in the third quarter, compared to a 0.2% y/y fall in the second quarter and a 0.4% y/y rise in the first. Italy has now slipped into a technical recession, which is defined as two successive quarters of shrinking GDP on a q/q basis.
The breakdown of the GDP data further highlighted the weakness of the economy, with consumer spending, investment and exports all contracting. Indeed, GDP would have contracted even more sharply q/q, but for a building up of inventories contributing 0.1 percentage point.
Excluding inventories, domestic demand contracted by 0.3% q/q in the third quarter, having fallen by 0.2% q/q in the second quarter. Private consumption struggled markedly, declining by 0.4% q/q and 0.6% y/y. A breakdown of spending by type of good reveals plummeting new car sales and still weak retail sales. Worryingly, the average level of new registrations declined 12.2% y/y in the third quarter. Italian consumers' purchasing power has been hit by elevated energy and food prices, while consumer confidence has plunged amid heightened concerns over the economy and jobs.
Gross fixed capital formation in the third quarter shrank by 1.9% both over the quarter and year. Business investment intentions have been scaled back in light of the ongoing global economic and financial crisis. Machinery and equipment expenditure was particularly weak, plummeting by 3.5% q/q, and was 2.5% lower than a year ago. Construction investment was also curtailed in the third quarter, when it fell 0.6% q/q and 1.2% y/y. Meanwhile, government spending expanded by 0.1% q/q, and was 1.1% higher than it had been year earlier. The government is still under considerable pressure to contain expenditure and improve underlying public finances.
Net trade made a negative contribution of 0.3 percentage point to the q/q GDP performance in the third quarter. This was down from a 0.1 percentage point negative contribution in the second quarter. Exports of goods and services contracted 1.6% q/q in the third quarter, after a 1.1% q/q fall in the second quarter. Consequently, exports were down 3.1% y/y in the third quarter. Meanwhile, Italian imports of goods and services contracted for the fourth successive quarter in the third quarter, down by 0.5% q/q. Consequently, imports were down 3.4% y/y in the third quarter.
Outlook and Implications
Italy is set to endure a deeper and a more prolonged recession than previously anticipated as confidence and overall economic activity has plunged dramatically in the wake of the ongoing financial turmoil. Activity is set to remain very weak, hurt by markedly weaker global demand and dismal business and consumer confidence. Consequently, real GDP expected to contract by 0.1% in 2008 and 1.2% in 2009, according to the December interim forecast. A key concern is that waning demand from the United States, United Kingdom, and the Eurozone will hit Italian export sales. The United Kingdom and most of the Eurozone are now in or close to recession.
Consumer spending will be subdued as households are increasingly cautious. Private consumption is expected to contract in 2008 and 2009. A key development is likely to be slower real household income growth resulting from possible employment losses in late 2008 and 2009. In addition, consumers will find it difficult to obtain credit as banks tighten their lending criteria. Meanwhile, many households remain troubled about their current and future economic situations. Consumers continue to express deep-rooted concerns about both the economy and the labour market. Consequently, we believe consumers could choose to increase their precautionary savings rather than spend any additional disposable income. Indeed, regular consumer confidence surveys continue to highlight that many households would prefer to hold off on purchasing consumer durables now or within the next 12 months.
Firms are likely to be wary about their investment plans. Business investment is expected to contract in 2008 and 2009 despite firms needing to renew their machinery and equipment after a prolonged period of depressed spending. Firms' spending plans are likely to be curbed by the limited availability of credit from the disrupted international financial markets, coupled with heightened fears about the health of the Italian and global economies.