The Italian Economy: Recovery postponed until the spring

In February 2020, 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. As expected, a fast recovery started during the spring. But a fast increase in Covid-19 cases in the fall of 2020 again led to various strict measures to contain the pandemic. Although vaccines are now available (or will soon be available), I expect that the various measures will only be gradually removed in the next months. Many of them will probably remain in place until the end of the spring. After the Italian economy shrank by 5.5 percent in the first quarter of 2020 and by 13.0 percent in the second quarter, the economy expanded with 15.9 percent in the third quarter. Both private consumption and private investment strongly recovered after dramatic contractions in the first half of the year.

I have always been 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). Expansionary fiscal and monetary policies will support the recovery. Italy will receive funds from the recovery fund of the European Union (more than 200 billion euros in the next years). However, in 2021, only a small amount will probably be absorbed by Italy. In the coming months, the pandemic and measures to contain it will still be 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 9 percent. This will be followed by a rebound of around 5 to 6 percent in 2021. In a more dramatic scenario (for instance, if the current second wave of the pandemic lasts longer than expected), the rebound in 2021 will be only at around 4 percent. As I mentioned above, such forecasts are obviously associated with a high degree of uncertainty.

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