Italy Sees The Phantom Of The Recession

Italy Recession, Prime Minister Giuseppe Conte

After three and a half years of expansion, the economic growth rate for Italy is now negative

Last week Premier Giuseppe Conte had to admit that Italy was entering a technical recession. The Prime Minister explained: “I expect a further contraction of GDP in the fourth quarter of 2018.” A negative figure after 0.1% already certified by Istat in the last quarter (and therefore two consecutive quarters with negative growth, first contraction after a series of 14 positive quarters) is equivalent to the “technical recession.” A possibility that the Bank of Italy and the International Monetary Fund, a few days ago, had already hypothesized.

What is a technical recession?

A technical recession is experienced when the real gross domestic product shows a negative change for at least two consecutive quarters. After three and a half years (14 months) of expansion, the first decline in economic activity was announced in November, followed by the second, announced by Premier Conte. In an economic recession, on the other hand, there is a negative change in the gross domestic product compared to the previous year. If this decline is greater than -1%, it is called an economic crisis.

The recession (like growth) has a decisive impact on the economic policy of a State; many other factors such as debt and deficit are based on the gross domestic product. For example, the European Union Stability and Growth Pact takes into account the relationship between debt and GDP. If a State has a large public debt, but at the same time a high GDP, it does not run the risk of insolvency or financial danger. The most important factor is the relationship between the two dimensions. During the recession, consumers’ demand for goods and services often decreases as well as the rate of production (the last survey in Italy recorded a -2.6% change in production).

A few days ago, another worrying sign appeared. The EU estimates minimal growth for the Italian GDP in 2019. There is great uncertainty about Italy’s economic prospects with a record cut of GDP in Italy, +0.2% in 2019. In 2019 Italian GDP “will fall to +0.2%, considerably less than anticipated” in the autumn forecast (+1.2%). The EU Commission wrote in the new estimate that they predict “anemic” economic activity in the first half of the year. The revision, the largest in the EU, is due to “a worse than expected slowdown in 2018, global and domestic policy uncertainty and a much less favorable investment perspective.”

Political uncertainties

Political uncertainties weigh heavily on the minds of Italians. Apart from external factors affecting many countries, in Italy the uncertainty about economic policies has had negative repercussions on business confidence and these financial conditions are effecting international trust. The vice-president of the EU Commission, Valdis Dombrovskis said, “Italy needs deep structural reforms and decisive action to reduce high public debt — in other words, responsible policies that support stability, trust, and investment.”

The president of the European Parliament, Antonio Tajani, commented on the winter economic forecasts of the EU Commission: “I am also worried about pensions; in short, the tax burden will hit the middle class and the weaker classes,” he specified. “Perhaps instead of doing this it would be enough to change the government.”

However, our country is not the only one to have heavily corrected the autumnal estimates. “Among the major member states, downward revisions of growth have been considerable”, not just for Italy, but also for “Germany and the Netherlands.” The GDP of Germany was revised to 1.1% from 1.8%, while that of the Netherlands to 1.7% from 2.4%, with a cut for both countries of 0.7% compared to to the autumn forecasts.

A lower estimate than that envisaged by the Italian government is the result of several factors. The project of economic expansion envisaged by the current government (led by the Five Star Movement and the League parties) contains elements that are widely contradictory. Increasing public spending on anti-poverty actions such as the citizenship income would require an increase in taxation to get the accounts back. However, this is extremely unlikely since the flat-tax and other fiscal measures seem to go in the opposite direction.

The strong dependence on international markets makes such a wide-ranging project impossible. Increasing welfare policies are state benefits that Italy certainly needs and it is also true that before a period of economic expansion, state coffers can go into recession to promote investment in public works. However, at the present time, this recovery still seems far away, above all because the new economic maneuver of the Italian government seems to be trying to make everyone happy, yet not actually satisfying anyone. The risk is again that the weight of this political schizophrenic attitude, impacts the pockets of the middle class who are already endangered in many Western countries.