Italy: Political Uncertainty Weighs on Growth Outlook

Consensus Forecasts

Centre-left leader Pier Luigi Bersani has failed in his recent attempt to form a governing coalition following February’s inconclusive parliamentary elections. Italian President Giorgio Napolitano will now explore other routes out of the political impasse as indicators suggest that the recession could yet deepen further. The breakdown of the Q4 2012 national accounts confirmed a 0.9% (q-o-q) contraction in GDP and showed household consumption and gross fixed investment slumping by 0.7% and 1.2%, respectively. Consumer spending has been hampered by weakening labour market fundamentals. January saw a 3.0% (y-o-y) fall in retail sales, after an upwardly revised 3.4% fall in December. The unemployment rate, meanwhile, edged down by 0.1% to 11.6% in February as firms seemed to expect some moderation in austerity after the election. However, joblessness remains near record-high levels and the youth unemployment rate stood at a massive 37.8% in February. The manufacturing sector accounts for almost one-fifth of Italian GDP and recovery prospects dimmed further as the PMI fell to a seven-month low of 44.5 in March. Furthermore, calendar-adjusted construction output dived by 12.0% (y-o-y) in January. Consequently, our panel has downgraded its forecast for 2013 industrial production.

There are concerns that Italys bond market will grow increasingly vulnerable the longer political deadlock drags on, at a time when financial markets have already been shaken by the Cypriot banking crisis. However, Italian 10-year government bond yields have edged down by 20bp to 4.4% since our last survey on March 11. The extended recession has kept a lid on prices in recent months and inflation cooled from 1.9% (y-o-y) in February to 1.7% in March.

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