The Italian Economy: Will Draghi make the difference?

Italy has been in a difficult economic situation for many years. The pandemic made the economic and social problems even worse. Nevertheless, I am optimistic for Italy and the Italian economy. Despite various remaining problems, there is hope for new dynamism after the pandemic and several reasonable reforms. After an economic contraction of almost 9 percent in 2020, I expect an economic expansion of around 4 percent in 2021 followed by a growth rate of around 5 percent in 2022.

The coronavirus pandemic caused a a health crisis and a severe recession in Italy. Many people died from the virus. Gross domestic product dropped by 8.9 percent in 2020 and the situation on the labor market is difficult. 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 of 2020. However, a fast increase in Covid-19 cases in the fall of 2020 again led to various strict measures to contain the pandemic. Many of these measures have remained in place. Some regions could somewhat lessen the measures while others had to tighten them again amid high infection rates.

After the Italian economy had expanded by 15.9 percent in the third quarter of 2020 (after drops of 5.7 percent in the first quarter and 12.9 percent in the second quarter), output again contracted at a rate of 1.8 percent in the fourth quarter of 2020 and stagnated in the first quarter of 2021 (+o.1 percent). This was no surprise. In my April forecast, I had expected economic stagnation in the first quarter. While private investment increased at a solid rate in the first three months of 2021 (+3.7 percent), private consumption d

Several vaccines are now available and I expect that the various measures will be gradually removed in the next months. The beginning of the summer also helps bring infection rates down. However, it is not known at the moment whether virus mutations will make the situation worse again. For instance, some or all the available vaccines might not be fully effective against these mutations.

After the Italian economy had expanded by 15.9 percent in the third quarter of 2020 (after drops of 5.5 percent in the first quarter and 13.0 percent in the second quarter), output again contracted at a rate of 1.9 percent in the fourth quarter of 2020. While private investment moderately increased, private consumption decreased 2.7 percent. There was a rise in public spending (+1.5 percent), which prevented a higher contraction of economic activity. There was a sharp moderation in export growth (+1.3 percent), while imports expanded at a solid rate (+5.4 percent).

Since the start of the pandemic, my main worries have not been related to the short-term, but to developments in the medium- and long-term. There will probably be a solid recovery over the summer. The rebound will be supported by a moderate increase in tourism exports. Currently, one can expect that a fair amount of (vaccinated) tourists will be allowed to visit the country, although the numbers seen before the pandemic will obviously not (yet) been achieved. In the fall and winter, the economic recovery will continue, but slow down.

Expansionary fiscal and monetary policies will support the gradual recovery of the economy and the labor market. But the situation will continue to be difficult for many people. Monetary policy of the European Central Bank will continue to be expansionary. In addition, Italy will receive financial support from the recovery fund of the European Union (probably more than 200 billion euros) and supplement them with a small amount of own fiscal resources. Many effects of these public expenditures will be relevant for the medium term, but there might also be some smaller short-run impacts. Thes funds are planned to be used, among others, for infrastructure projects such as high-speed trains, “green” energy, and projects surrounding the “digital economy”. In the years to come, the further accumulation of public debt might be a burden and the government should aim at gradually achieving a balanced budget to bring the debt-to-GDP ratio down again in the medium term. The new prime minister, Mario Draghi (the former ECB president), is trying to implement sensible measures to reform the Italian economy. One should not expect miracles, but I am cautiously optimistic for the Italian economy. It has a lot of potential such as a lot of productive small and medium-sized firms and skilled people.

For the first quarter of 2021, I expect an economic stagnation, which will be followed by a small expansion in the second quarter. For the third quarter of 2021 (July to September), I expect a solid recovery with a growth rate of almost 10 percent. The recovery will then continue but slow down to around 1 percent per quarter. For the whole year 2021, I see an economic expansion of around 4 percent followed by a growth rate of around 5 percent in 2022. Inflation will gradually increase towards two percent (the target of the ECB). The situation on the labor market will also improve, but remain difficult for many people. Obviously, such forecasts are associated with a high degree of uncertainty.

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