Italy: Soft Growth Confirmed In The Third Quarter

An unsurprising consumption drive and less de-stocking drove growth while net exports were a drag. We see little chance of an acceleration in the fourth quarter and confirm our forecast of average 2019 GDP growth at 0.2%

Source: istock

Domestic demand drive overcame net exports drag

The revised estimate of 3Q19 GDP data, released earlier by Istat, confirmed that the Italian economy expanded by 0.1% quarter-on-quarter in seasonally adjusted terms and by 0.3% year-on-year on the working days adjusted metric. The focus of today’s release was the detailed demand breakdown, which was not disclosed at the preliminary estimate stage. Data shows that the mild expansion built on positive contributions of 0.3% from both private consumption and inventories (with gross fixed capital formation and public expenditure growth neutral) and a 0.4% subtraction from net exports, mainly driven by an acceleration in imports.

Private consumption likely supported by labor market resilience

The Italian economy has been experiencing quasi stagnation since 3Q18 and today’s release provided another confirmation that the very low growth patch is still in place. Relative strength in private consumption is not surprising, given past labor market resilience and low inflation. At the same time, soft investments likely reflect the dampening effect of external headwinds on Italian exports. Trade flows remain exposed to the unwelcome volatility generated by developments in the US-China trade war and Brexit, with exports boosted during periods of hoarding and penalized thereafter.

No acceleration expected in 4Q19

Looking ahead, there seems to be little reason to expect either a substantial acceleration or a sudden dive in Italian GDP over the current quarter; available data evidence, instead, points to continuity along the current path. High-frequency confidence indicators have been sending conflicting signals over the October–November period, with composite business confidence tentatively bottoming out (under a services drive) and consumer confidence falling.

On the hard numbers front, the October labor market report, released earlier today by Istat, confirms that employment is stabilizing. The mild 0.2% monthly increase was mainly due to the independent component and to temporary contracts, while open-ended contracts were stable on the month. A small decline in the labor force helped the unemployment rate to fall back to 9.7% (from 9.9% in September). Leading labor market indicators are pointing to some employment fatigue ahead, particularly on the temporary jobs component. 

We confirm our forecast of average GDP growth of 0.2% in 2019.

All in all, the combined reading of available indicators against a backdrop of rising domestic political noise seems to point to a continuation of the current soft patch. We confirm our forecast of average annual GDP growth of 0.2% in 2019.