Italy Country Risk Report Q1 2020
The Five Star Movement (M5S) and Democratic Party (PD) coalition bodes well for Italy in the short term. As we expected, negotiations for the 2020 budget are going smoothly compared to the previous year's. This government bodes well for Italy's fiscal position, although we do believe the coalition is at high risk of collapse in 2020. This would likely lead to elections that the anti-immigration far-right League is poised to win.
Backward data revisions showed that the economy did not fully stall in 2019. As a result, we have revised up our 2019 GDP growth forecasts to 0.1%. The economy remains at high risk of falling into technical recession in the coming quarters.
The Italian export machine will continue underperforming comparable eurozone peers in the coming years, due to long-standing competitiveness issues and the country's rigid labour market. There are major downside risks to the Italian exports outlook, like slowing growth in trade partners, US tariffs on EU autos and a potential 'no deal' Brexit.
The M5S-PD administration bodes well for Italy's fiscal position, but the deficit is likely to remain wide in the coming years. Italian debt sustainability poses one of the most significant systemic threats to the macroeconomic stability of the eurozone. Major Forecast Changes
We now see real GDP growth coming in at 0.1% in 2019, 0.4% in 2020 and 0.3% in 2021, from -0.1%, 0.3%, and 0.4% previously, on the back of our expectation for government spending to not contribute to growth substantially, as well as a sluggish export outlook.
We have adjusted our budget deficit forecasts at 2.4% of GDP for 2019 and 2.6% for 2020. We believe the actual deficit will fall wide of the revised 2.0% deficit target.
The rise in bond yields highlights underlying government debt and political risk in the eurozone. While a region-wide downturn is not our core scenario, there is a growing possibility of a substantial drop in growth and rise in risk premiums.
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