Italy faces record recession as pandemic bites

ROME, Italy – The Italian government on Thursday, April 30, announced a slew of new measures to save its struggling economy amid fears the coronavirus pandemic could force a contraction of more than 10% of gross domestic product (GDP) this year.

Italy, home to the eurozone’s 3rd largest economy, has been hard-hit with almost 28,000 deaths due to the virus, with the economy shrinking 4.8% in the 1st quarter compared to a eurozone average of 3.8%.

Italy was the first country in Europe to be hit by the pandemic, in particular its economic heartland in northern regions Lombardy, Veneto, and Emilia-Romagna.

Together those regions represent 45% of Italy’s GDP, driven by exports including cars and luxury goods.

Italians have been on nationwide lockdown since March 10, with all non-essential production shut down since March 22, essentially paralyzing the economy.

Last week businesses were allowed, little by little, to start work again but economic activity remains extremely limited.

On Thursday, Prime Minister Giuseppe Conte told parliament that the government was revising down its economic forecast with a budget deficit increased by 55 billion euros ($60 billion) and a series of aid measures, including 25 billion euros for employment and income support and 15 billion euros for businesses.

The new budget forecasts a GDP contraction of 8% this year overall, although it hopes the economy will begin to bounce back beginning in the 3rd quarter.

However Conte warned that if the virus impact persisted, the recession could be up to 10% of GDP, indicating the “gravity of the situation.”

The International Monetary Fund’s latest prediction for Italy’s economy this year is a contraction of 9.1%.

In the 1st quarter of this year, the economy shrank by 4.7% compared to the previous quarter, the national statistics institute Istat said on Thursday.

Lockdown losses

The official drop in unemployment in March of 0.9 percentage points to 8.4% is misleading as it only takes into account those actively seeking employment and not those who have stopped work because of the lockdown.

In March, the number of people not working rose by 2.3%, Istat said.

Ratings agency Fitch on Tuesday, April 28, lowered its rating for Italian debt to BBB- with a stable outlook, predicting a recession this year of 8%.

Italy’s Finance Minister Roberto Gualtieri responded by saying that “the fundamentals of the Italian economy and public finances are solid.” 

Fitch’s rating drop has put Italian sovereign debt one notch about “junk,” as Moody’s did already in October 2018, well before the pandemic.

Last week, the government warned that Italy’s economically-punishing coronavirus lockdown, combined with big-spend stimulus packages to support families and firms, would push the deficit and public debt to dizzying heights.

The pandemic was a “black swan,” an unforeseen event beyond the norm with potentially serious consequences – without which the country’s weak economy had been expected to gradually improve over the year, the government said.

S&P nonetheless maintained the country’s rating at BBB, or two notches above the speculative category, citing in particular a diversified and rich economy as well as relatively low levels of private debt.  

It also expected that most of Italy’s new sovereign debt created by the crisis around the pandemic will be bought by the European Central Bank.   

Italy’s forecasts are well above the limits set by the EU’s Stability and Growth Pact, which calls for deficits to be capped at 3% of GDP, and a debt-to-GDP ratio of no more than 60%.

But such rules have been suspended as governments scramble to contain the economic fallout and prevent mass bankruptcies and layoffs. 

Italy’s public deficit is forecast this year to rise to 10.4% of GDP. That is a mammoth leap from the 2.2% expected before the pandemic hit, and the 1.6% recorded in 2019.

Public debt is set to jump to 155.7% of GDP, up from the pre-virus outbreak forecast of 135.2%, and the 134.8% recorded in 2019. – Rappler.com