Italy’s economic growth likely to be volatile in coming quarters

Italian economy is not expected to gain much traction. Moreover, it is expected to be volatile in the quarters to come as the economy will have to take in several uncertainty shocks. The economic outlook is fogged by several downside risks, especially from the banking sector, the continuation of Brexit talks and the October Constitutional referendum. However, this will not disrupt the economic recovery.

FX depreciation, fiscal stimulus measures and the gradual recovery in the oil prices are expected to keep the Italian economy from falling into recession in 2016 and in 2017, according to Societe Generale.

But as the impact of these positive factors diminishes, increased uncertainty, huge amounts of public debt and the lack of structural reforms are likely to put strong downward pressure on economic growth in the medium term. In the next five years, Italy’s economic activity is likely to grow at an annual rate of lower than 1 percent, added Societe Generale.

Two important channels of transmission are seen to the Italian economy following the Brexit vote – trade and uncertainty. Italy ships 6 percent of its total exports to the UK, mostly, from the transformed food, transportation and industrial machinery sectors. Meanwhile, businesses and consumers will potentially put their spending plans on hold pending larger clarity on the European situation.

Overall, these shocks are expected to subtract 0.5 percent from Italy’s GDP growth in 2017 and 2018, said Societe Generale in a research report. These are not severe, but they are not insignificant either. Other factors such as employment, profits and inflation will deteriorate marginally.

Meanwhile, slow increase in oil prices and the continued rebound in growth are likely to favour acceleration in inflation. However, in the baseline scenario, inflation is expected to be below 2 percent per annum in the forecast horizon.