Italy’s economy continues to contract but at a slower pace

Italy's GDP contracted by 0.4% quarter-on-quarter in the first three months of this year, according to preliminary estimates. But that's much better than the -1.8% figure we saw at the end of 2020. It looks as if Italy has now completed the second trough of a 'W'-shaped recovery.

We don't have the details but the Istat agency said the quarterly change was the result of a positive contribution of domestic demand (gross of inventories) and a negative contribution of net exports. Unsurprisingly, the supply-side angle shows that value-added increased in industry and agriculture and contracted in services.

Today’s release confirms our perception that over the first quarter of the year, strength in manufacturing was not enough to compensate for the residual weakness in services induced by lingering soft lockdowns. The positive contribution coming from gross domestic demand might hide some inventory accumulation (or at least a much-reduced inventory decumulation), while private consumption continued acting as a drag.

Labour market data for 1Q21, also released earlier today, looks consistent with this assumption. Employment contracted 1.1% QoQ and unemployment increased by 1.5%, pushing the unemployment rate to 10.2%. Since January 2021, labour market data has been compiled with a new methodology which does not consider those under furlough schemes and autonomous workers absent for more than three months as unemployed. This shift, while producing an instant downward shift to the employment pool, should help smooth the impact on unemployment rate data as labour market support schemes are phased out.

We anticipate a return to positive quarterly growth in the second quarter of 2021. Once again, the speed of the recovery will crucially depend on the pace of re-openings which, in turn, will be closely linked to developments in the Covid-19 crisis and in vaccinations.

With a target of 500-thousand vaccinations a day now in sight, the planned restriction easing programme is getting more credible and the risk of widespread re-closures reduced. This is Prime Minister, Mario Draghi’s “calculated risk”. If re-openings proceed, consumers will be in the position to spend at least part of the accumulated involuntary savings, helped for the time being by relatively benign inflation developments.

The flash estimate of the April Harmonised Index of Consumer Prices, just released by Istat, shows a modest increase in the headline rate to 1%, fully driven by the energy component, accentuated by base effects. This improving background is also reflected in April confidence data, which posted increases across the spectrum. To be sure, the manufacturing-services dichotomy remains, but order expectations were strengthening substantially across services businesses too.