Articles
31 July 2019

Italy: The Italian economy stagnated in 2Q19

No big directional hints at this stage. Still, we believe that surprisingly resilient labour market data might have been at work here, supporting disposable income against a decelerating inflation backdrop. Other components might have reflected the normalisation of past distortions in international trade flows

Flat 2Q19 growth

According to the Istat preliminary estimate, in 2Q19 Italian economic growth was flat both on the quarter and in YoY terms (+0.1% QoQ and -0.1% YoY in 1Q19). This was in line with our forecasts and slightly better than consensus. So, both net exports and domestic demand (gross of inventories) growth was neutral on the quarter

As usual at the preliminary estimate stage, Istat did not disclose the full demand breakdown but indicated that both domestic demand (gross of inventories) and net exports were growth neutral on the quarter. Unsurprisingly, Istat added that value added contracted in manufacturing and agriculture, and expanded in services.

Possible drivers

Lacking the demand detail, it is hard to draw conclusions on the underlying trends, but we sense that the second quarter might have been affected by the normalisation of distortions which had characterised 1Q19 dynamics. In particular, the zero contribution of net exports follows a quarter when Italian exports had been propelled by import hoarding in the UK as the Brexit deadline approached.

On the domestic demand front, we believe that a rebalancing between components might have been at work, with a reduced quarterly drag from inventories balanced by a modest positive contribution of private consumption. This seems to be supported by indications coming from preliminary June labour market data, which turned out surprisingly strong given the stagnating backdrop. Stable employment, combined with declining unemployment and slightly declining inactives, brings the unemployment rate down to 9.7%, the lowest level since February 2012. Based on monthly preliminary data, we note that in 2Q19 employment should have increased by c100K over 1Q19, helping support disposable income as inflation cools down.

Too early to call, but we're looking for improvements in 3Q

Looking forward, data evidence for 3Q19 is, for the time being, limited to July confidence indicators, which sent a glimmer of hope. In July consumer confidence rebounded healthily, mainly driven by the economic conditions component, possibly boosted by past improvements in the labour market. On the business confidence front, the only negative note came from a confirmation of the deteriorating trend of confidence in the manufacturing sector, driven in turn by the order component for intermediate and investment goods.

All other sectors posted confidence gains on the month, more markedly so among big retailers and specialized builders. Too early to make strong calls for GDP growth on the quarter, but available evidence seems yet compatible with our current forecast of a meagre 0.1% QoQ expansion. We thus tentatively confirm our 0.1% forecast for average 2019 GDP growth, with slight downside risks.

Content Disclaimer
This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more