Italy Country Risk Report Q1 2020

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.

Key Risks

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.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Country Risk Summary
Economic Risk Index
Political Risk Index
SWOT
Economic – SWOT Analysis
Political – SWOT Analysis
Economic Outlook
Economic Growth Outlook
Stalled Italian Economy To Contract From H219
TABLE: FREQUENCY INDICATORS SUGGEST RECESSION AHEAD
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
External Trade And Investment Outlook
Italian Trade Surplus Stable Despite Weak External Environment
Outlook On External Position
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
TABLE: TOP FIVE GOODS EXPORTS IN 2017
TABLE: TOP FIVE GOODS IMPORTS IN 2017
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
Monetary Policy
Eurozone's Monetary Policy More Accommodative For Longer
Fiscal Policy And Public Debt Outlook
Italian Fiscal Deficit To Widen Slightly In 2020
Currency Forecast
EUR: Retreating On Dollar Strength
TABLE: EUROZONE CURRENCY FORECAST
THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings’ Credit Rating. Any comments or data included in the report are solely derived from Fitch Solutions Macro Research and independent sources. Fitch Ratings’ analysts do not share data or information with Fitch Solutions Macro Research.Italy Country Risk Q1 2020Contents10-Year Forecast
The Italian Economy To 2028
Major Macroeconomic Challenges Ahead
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Political Outlook
Domestic Politics
Italy's Unstable Government Could Delay Domestic And Eurozone Reforms
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Fiscal Adjustments, Demographic Ageing To Dominate Italy's Long-Term Political Outlook
Operational Risk
Developed States
TABLE: LABOUR MARKET RISK INDEX
TABLE: LOGISTICS RISK INDEX
TABLE: CRIME AND SECURITY RISK INDEX
TABLE: TRADE AND INVESTMENT RISK INDEX
Global Macro Outlook
Lower Growth, Despite Some Trade Progress
TABLE: GLOBAL MACROECONOMIC FORECASTS (2018-2023)
TABLE: DEVELOPED MARKETS – REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS – REAL GDP GROWTH, % y-o-y
Index Tables
TABLE: ITALY – MACROECONOMIC DATA & FORECASTS

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