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Strong Rebound is Underway; EU Funds to Help Raise Medium-Run Growth Potential

Continued robust growth expected over the second half of this year although risks have settled on the horizon

We should see continued robust growth over the second half of this year if Italian households continue spending some of the forced savings accrued during successive lockdowns, further progress is achieved with vaccination of residents and investment stimulus from the Next Generation EU recovery programme begins flowing in over coming months.

However, we also acknowledge that there are downside risks to the economic outlook moving ahead as Covid-19 cases have climbed due to transmission of the Delta variant, potentially restricting some economic activities, plus the possibility of a harsher winter flu season.

Nonetheless, Italy’s Q2 GDP came in at double consensus estimates at an elevated 2.7% on quarter, largely in line, however, with our estimate for the quarter.

A large beneficiary of EU funds

For the medium-run outlook, Italy is one the largest beneficiaries from the Next Generation EU plan, particularly important given low levels of investment since the global financial crisis.

Inflation is another factor. Italy’s inflation rate, at 0.9% YoY in July, is running well under the euro area’s (2.2%) and is likely to continue underperformance even though we might consider much of current low inflation of Italy to associate with transitory factors and Italy’s inflation medium run is likely to rest above a 0.7% pre-crisis rate.

Higher but still comparatively modest levels of medium-run nominal growth

Higher real and nominal growth for Italy is anticipated as compared with rates from before the Covid-19 crisis, but the nominal medium-term trend will nonetheless remain comparatively modest at around 2%, representing an ongoing constraint for debt sustainability.

After all, real growth averaged only 0.3% over a 2010-19 decade (with nominal growth of 1.3% on average over this period), while an expected 0.5% annual decline in the working-age population over 2021-26 remains a significant economic headwind.

Italy’s 10-year yield level trades currently near its historic lows, at below 0.6%, helped by ECB support, despite the significant increase in the country’s government debt by the equivalent of nearly 25% of GDP since the crisis started.

The next review of Scope Ratings’ BBB+/Negative Outlook sovereign ratings of Italy is on 20 August.

For a look at all of today’s economic events, check out our economic calendar.

Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Giulia Branz, Analyst at Scope Ratings, contributed to writing this commentary.


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