Analysis – Italy’s growth bubble bursts to reveal fragile outlook By Reuters
Written by Gavin Jones
ROME (Reuters) – Italy’s recovery from the COVID-19 pandemic is growing faster than expected as structural weaknesses return, raising risks for the euro’s third-largest economy’s fragile public finances.
After gross domestic product stagnated in the third quarter, national statistics agency ISTAT said this month it expected no further recovery and forecast 2024 growth of just 0.5%, half of the government’s official target of 1%.
ISTAT’s assessment would return Italy to its usual place among the weakest players in the euro area and contradict the rosy picture painted by Prime Minister Giorgio Meloni, along with other economists, in the past few months.
Recent data has been negative. Business confidence is at its lowest point since 2021, a long-running manufacturing crisis is deepening, and the services sector that boosted the economy for most of the year is also contracting.
“The Italian business model made up of small firms no longer encourages growth, lacks sufficient public capital and fights green change instead of accepting it as an opportunity for growth,” said Francesco Saraceno, professor of economics at Paris’s Science Po and Rome’s. LUISS UNIVERSITY.
Analysts say this situation is particularly worrying considering that Italy is receiving a steady flow of tens of billions of euros from Brussels as part of the European Union’s post-COVID Recovery Fund.
Spain, one of the biggest recipients of this fund, is growing four times faster.
SHORT-TERM INCENTIVES
Saraceno said that Italy’s resilience in 2021-2022 was mainly based on government-subsidized benefits for the construction sector – the so-called “superbonus” – which enabled an increase in investment that has reversed this year as the expensive program has been completed.
Italy has been the euro’s weakest economy since the introduction of the single currency 25 years ago, and its latest downturn threatens to strain its public finances, which have been put at risk by a huge bonus.
Public debt, the second largest in the euro area, is forecast by the government to rise to around 138% of GDP in 2026 from 135% last year.
If growth in 2025 falls well below Rome’s target of 1.2%, as most forecasters now expect, that debt ratio will likely rise quickly. Investors may be more reluctant to buy Italian bonds, increasing the government’s debt burden.
Italy is already under orders from the EU to reduce its budget deficit due to large deficits over the past two years, eliminating any hope of using its own path to growth.
THE POWER OF SPAIN AT THE FRONT
The country’s weakness is in stark contrast to Spain, whose GDP is forecast to grow by around 3% this year. Over the past year Spain has grown at quarterly rates of between 0.7% and 0.9%, while Italy has grown between zero and 0.3%.
Angel Talavera, head of European research at Oxford Economics, said Spain’s success in attracting immigrants and integrating them into its economy was a major factor behind its growth, along with economic growth and strong consumer spending.
Italy’s minority migrants rarely work in skilled or low-skilled jobs, and are often trapped in the informal economy.
Meanwhile, young Italians are leaving the country in their thousands due to the lack of promising job prospects. I
Population decline alone is a source of economic weakness.
“They are very different types of economies, Spain relies heavily on services and tourism, while Italy still has a large manufacturing sector that is not competitive and acts as a brake on expansion,” said Talavera.
“In the last 20 years, Spain also seems to have done a better job of modernizing infrastructure and public services,” he added.
EDUCATION, EMERGENCY
Economists agree that the incomplete list of Italy’s problems includes underinvestment in education, infrastructure and public services, bureaucratic pressure, risk-averse banks, an underdeveloped stock market and a dysfunctional justice system – all problems that have been unresolved for years.
There is also a surprising level of consensus about what top policy should be to improve things, a question Reuters asked of Italy’s leading economists.
Roberto Perotti, professor of economics at Milan’s Bocconi University, Lorenzo Bini Smaghi, former member of the board of the European Central Bank, Andrea Roventini, professor of economics at Pisa’s Sant’Anna University and Science Po’s Saraceno all say that the focus should be on investment in education and research.
Lorenzo Codogno, head of LC A macro (BCBA)
