The Italian Economy: Will the soccer champion also be an economic powerhouse?

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. The Italian soccer team recently won the European Championship. Of course, this is not more than a symbol. But it should remind us of the many strengths of Italy including, among others, a high average skill level in the population. After an economic contraction of almost 9 percent in 2020, I expect an economic expansion of 4.5 percent in 2021 followed by a growth rate of 5.3 percent in 2022. Certainly not the highest growth rates in Europe, but nevertheless a solid performance.

The coronavirus pandemic caused 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 remains 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. In the course of the spring and summer, many of these measures could be gradually removed. The availability of vaccines greatly helped improve the situation. In addition, the beginning of the summer also contributed to bringing infection rates down. However, it might be that virus mutations will make the situation worse again. The so-called delta mutation is a warning sign. Some or all the available vaccines might not be fully effective against new mutations.

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 decreased by 1.2 percent. Export growth was modest at 0.5 percent, while imports expanded more strongly (+2.3 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 significant number of 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 a considerable number of 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). Many effects of these public expenditures will be relevant for the medium term, but there might also be some smaller short-run impacts. These funds are planned to be used, among others, for infrastructure projects such as high-speed trains, “green” energy, and projects surrounding the “digital economy”. One may expect that the recovery fund will lift the gross domestic product of Italy by around 4 percent in the coming years. 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.

After the economic stagnation in the first quarter of 2021, I expect a solid growth rate in the rest of the year. For the whole year 2021, my current forecast is 4.5 percent. The recovery will be even somewhat stronger in 2022 with a growth rate of 5.3 percent. Thus, I am slightly more optimistic than in my April forecast. Inflation will gradually increase towards two percent (the target of the ECB). The situation on the labor market will also gradually improve, but remain difficult for a considerable number of people. For the medium-term, I am cautiously optimistic that the Italian economy will be able to deliver higher productivity and growth rates than in the past decades. Forza Italia!

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