The Italian Economy: Gradual but bumpy recovery

Italy was the first European country that was severely hit by the Covid-19 pandemic and the first European country to impose a strict lockdown. As elsewhere, travel, tourism, hospitality, entertainment and many other sectors of the economy were hard hit. The Italian lockdown of the economy was especially strict. Since forecasts or scenarios are still associated with very high levels of uncertainty, I still do not publish a detailed economic forecast. After the Italian economy shrank by 5.5 percent in the first quarter of the current year, the slump in economic performance was (as expected) much more pronounced in the second quarter with a output decline of 12.8 percent. Both private consumption and private investment decreased by more than 10 percent compared to the first quarter.

I am cautiously optimistic as regards the short-term recovery in the summer and autumn, but relatively pessimistic as to economic developments in the coming months and years (I also hold this view for several other countries). What one can say is that the economic recovery has started and continued during the summer. Expansionary fiscal and monetary policies support the recovery. Italy will also receive funds from the recovery fund of the European Union (around 200 billion euros in the next years), for instance, through the EU’s SURE scheme that has the goal to mitigate unemployment risks in an emergency. However, cases of Covid-19 have been increasing again (but less strongly than in Spain or France) and schools reopened in September. The pandemic and measures to contain it are still a serious drag on economic activity, the tourism sector is particularly affected. In addition, higher unemployment, liquidity problems, bankruptcies, and uncertainties will dampen the economic rebound. For the whole year of 2020, I expect a severe contraction of the economy of perhaps around 10 percent. This will be followed by a strong rebound of around 6 to 8 percent in 2021. In a more dramatic scenario (for instance, if there is a large second wave of the pandemic), the contraction in 2020 will be at around 12 to 14 percent. As I mentioned above, such forecasts are obviously associated with a high degree of uncertainty. Especially, there is the risk of a large second wave of the pandemic. At the global scale, worldwide tensions could increase – especially between the United States and China. And at the European level, it is still not clear how exactly Brexit will occur and whether it will cause damage to the Italian economy – at least in the short term.

While I use several models in my forecasts, my published numbers are also strongly influenced by my personal experience and judgment.

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