Italy very likely to move out of recession in Q1

The Italian recovery is materializing and Q1 GDP growth should reach 0.2% qoq (marginally lower than our 0.3% expected in March), turning positive only for the second time since the spring of 2011. This development will likely be attributable to the following factors:

1) Industrial sector no longer in recession. The recovery is mainly visible in manufacturing sector data. Consistent with the manufacturing PMI, industrial output in Q1 should rise by 0.2% qoq (the most solid reading since the recession started three years ago). This is mainly linked to stronger euro area demand and the weaker euro.

2) Service sector improving as well. Service sector activity seems on track to post a significant rise this quarter and also probably during Q2. Indeed, the services PMI reached 51.6 in March and a number of sentiment gauges published by ISTAT hint that the contribution to economic growth from this sector will be meaningful in Q1.

Household consumption is expected to have been a major contributor to Q1 growth (+0.4% qoq), consistent with the surge in consumer confidence and reflecting the impact of the various tax cuts decided by the government a year ago. 

Based on monthly trade data, Societe Generale concludes that the external sector contributed positively as well, with real exports growing by a healthy 1.2% qoq. Investment, in addition, probably increased marginally, adding to the positive reading posted during the prior quarter. For the coming quarters, this suggests that Italy should be able to post positive quarterly growth numbers in line with our March outlook.