Italy enters recession: another sign of a weakening Eurozone economy
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the Italian economy along with the Eurozone:
- The Italian economy fell into a very shallow recession in 2018Q4, with GDP contracting by 0.2% (QOQ), following a 0.1% (QOQ) fall in 2018Q3.
- In addition, Italy’s economy has several endemic problems including vulnerable banks which hold a considerable proportion of government debt, and a huge public sector debt-GDP ratio (over 130%).
- The IMF’s latest annual assessment of Italy painted a worrying picture, including high unemployment, very high public debt and vulnerable banks.
- There have been many institutional developments in the EU to shore up the Eurozone since the debt crisis, which peaked in 2010-2012.
- Economic and Monetary Union (EMU) is, however, still incomplete, not least of all because there is no fiscal union backing up monetary union.
UK developments included:
- The Bank of England left monetary policy unchanged at the February meeting, with Bank Rate staying at 0.75%. It seems some way off raising rates.
- The Bank downgraded their GDP growth forecasts in February’s Inflation Report for 2019 (to 1.2% from 1.7% in November) and 2020 (1.5%, down from 1.7%).
- According to the Bank the growth of consumer credit slowed in December – to 6.6 (YOY), compared with November’s 7.2%.
- The Markit/CIPS surveys were all weaker, and fairly subdued, in January, reflecting Brexit uncertainties.
Ruth Lea said, “Concerns about the Italian economy have given rise to renewed debate on the robustness of the Eurozone. There are few expectations that Italy will experience a major financial crisis in the near-term. But, if there were one in an economy as large as Italy’s, there must be doubts whether the Eurozone’s institutional arrangements, as they stand, would be robust enough to cope with it. There have, of course, been many developments to shore up the Eurozone’s institutions since the debt crisis. But European and Monetary Union (EMU) is still far from “complete” in some very key areas. Crucially, there is no fiscal union backing up monetary union. This leaves the Eurozone vulnerable to shocks.”