Italian economy in technical recession, high level of political uncertainty

First ISTAT (Italian National Institute for Statistics) showed that the Italian economy entered technical recession in Q418. Data showed that seasonally adjusted GDP for Italy contracted by 0.2% quarter-on-quarter (QoQ) in 4Q18 (from -0.1% QoQ in 3Q18).

European Commission cuts Italy 2019 growth forecast to 0.2%

Second, European Commission believes that GDP growth in Italy will be +0.2% in 2019, sizeably less than anticipated in the autumn outlook. This is due to a worse-than-expected cyclical slowdown in 2018, increased by domestic policy uncertainty and firms’ substantially less favourable investment outlook. Furthermore, the slowdown of important trade partners is likely to have negative consequences on Italian manufacturing production.

Italy’s economy started losing momentum in early 2018 and fell into a contraction in the second half of the year. The initial slowdown was largely caused by less world trade, whereas the recent contraction of economic activity is more assignable to weak domestic demand, particularly investment, as uncertainty related to the government’s policy stance and rising financing costs reduced investments. We believe that economic activity is likely to be very weak in the first half of 2019.

Industrial production -5.5% YoY, recession could persist for a long time

The most recent macro data released was for industrial production. In December 2018 the seasonally adjusted industrial production index decreased by 0.8% compared with the previous month. The calendar adjusted industrial production index decreased by 5.5% compared with December 2017. Italian industrial production fell for a fourth straight month, we believe that the crisis in the production could mean that the recession may persist for a long time.

Spread just below 300 bps, Salvini wins in Abruzzo

In confirmation of this, the 10-year BTP-Bund spread hit a year high almost touching 300 basis points. Political uncertainty is still high after the regional election in Abruzzo. The League became the first party with a big increase in support to 28% of total votes, compared to an electoral disaster for the Five Stars movement which got just 19% of total votes, compared to 40% in the last election. The result in the mountainous central Italian region was just the latest indication that Five Stars are losing momentum.

For Italy’s populist leaders, Deputy Premiers Matteo Salvini and Luigi Di Maio, the Abruzzo election was an important battleground, assessing their relative strength ahead of European Parliament elections in May. Five Stars has already lost the lead in national opinion polls (in average Salvini is ahead 3-5%), increasing tensions in the government.
In the coming days there will be a dispute between Salvini and Di Maio about the TAV project (Turin-Lyon high speed railway) that could bring another political crisis within the Yellow-Green Government.

How are Italian banks reacting?

Italian banks were able to limit the losses thanks to very good earnings for Unicredit and Banco BPM, including profit improvements. They also they received relief from the ECB as their capital positions are above the levels required. Even still, Italian banks have dark clouds looming. We still believe that in the next months Italy could face a new political crisis. If the League strength is confirmed at European political elections, Mr Salvini could decide to call for a new election to be able to form a government just with right-wing parties