Analysis-Italy’s growth bubble bursts, revealing fragile prospects By Reuters

By Gavin Jones

ROME (Reuters) – Italy’s growth recovery from the COVID-19 pandemic is running out much faster than expected as structural weaknesses reemerge, raising risks for the third-largest economy’s fragile public finances. of the euro zone.

After gross domestic product unexpectedly stagnated in the third quarter, national statistics office ISTAT said this month it did not expect any recovery in the short term and forecast 2024 growth of just 0.5%, half of the target. 1% government official.

ISTAT’s estimate would return Italy to its usual place among the euro zone’s worst-performing countries and contradict an optimistic picture painted by Prime Minister Giorgia Meloni, as well as some economists, just a few months ago.

Recent data has been discouraging. Business confidence is at its lowest level since 2021, a long-running manufacturing crisis is deepening and the services sector that had propped up the economy for most of the year is now also contracting.

“Italy’s business model, made up of small companies, is no longer conducive to growth, has insufficient public investment and is fighting the green transition instead of accepting it as a growth opportunity,” said Francesco Saraceno, professor of economics at Science Po in Paris and in Rome. LUISS University.

Analysts say the situation is even more 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, the other main recipient of the fund, is growing at least four times faster.

SHORT-TERM BOOST

Saraceno said Italy’s dynamism in 2021-2022 was mainly based on state-funded incentives for the construction sector – the so-called “superbonus” – which fueled an increase in investment that has been reversed this year as the costly plan was phased out.

Italy has been the euro zone’s slowest economy since the launch of the single currency 25 years ago, and its latest slump threatens to derail its public finances, which have already been compromised by the superbonus.

The government forecasts that public debt, proportionally the second largest in the euro zone, will rise to around 138% of GDP in 2026 from 135% last year.

If growth in 2025 is significantly below the Rome target of 1.2%, as most forecasters now expect, that debt ratio will likely rise faster. Investors could then become more reluctant to buy Italian bonds, adding to the government’s heavy debt service burden.

Italy is already under orders from the EU to reduce its budget deficit due to huge excesses over the past two years, eliminating any hope of spending for growth.

SPAIN MOVES FORWARD

The country’s weakness contrasts sharply with that of Spain, whose GDP is expected to grow around 3% this year. Over the last year, Spain has expanded at quarterly rates of between 0.7% and 0.9%, while Italy has oscillated between zero and 0.3%.

Ángel Talavera, head of European research at Oxford Economics, said Spain’s success in attracting immigrants and integrating them into its economy had been a key driver of its growth, along with a tourism boom and strong consumer spending. .

Italy’s far fewer immigrants rarely do skilled or even semi-skilled jobs, and are often confined to the informal economy.

Meanwhile, thousands of young Italians are leaving the country due to a lack of promising career prospects. He

Population decline is in itself a source of economic weakness.

“They are quite different types of economies: Spain depends heavily on services and tourism, while Italy still has a large manufacturing sector that is increasingly less competitive and acts as a brake on expansion,” Talavera said.

“Over the last 20 years, Spain also appears to have done a better job modernizing its infrastructure and public services,” he added.

IT’S EDUCATION, STUPID

Economists agree that an incomplete list of Italy’s problems includes insufficient investment in education, infrastructure and public services, a stifling bureaucracy, risk-averse banks, an underdeveloped stock market and an inefficient judicial system – all problems that have remained unresolved for years.

There is also a perhaps surprising degree of consensus on what the top policy priority should be to improve things, a question asked by Reuters to five leading Italian economists.

Roberto Perotti, professor of economics at the Bocconi University of Milan, Lorenzo Bini Smaghi, former member of the board of directors of the European Central Bank, Andrea Roventini, professor of economics at the Sant’Anna University of Pisa and Saraceno of Science Po, said that The focus should be on investment in education and research.

Lorenzo Codogno, director of LC Macro (BCBA:) Advisors and former chief economist of the Italian Treasury said their priority would be further liberalization of the labor market.