Italy Braces for New Coronavirus Impact in Economic Outlook

(Bloomberg) -- Italy is starting to plan for what could happen to its economy if the coronavirus pandemic worsens significantly.

In a worst-case scenario, the Italian government sees gross domestic product dropping 10.5% this year and expanding only 1.8% in 2021, according to a draft budget outlook document seen by Bloomberg. The scenario draws on a study by Oxford Economics to factor in the impact of a renewed virus outbreak on the global economy.

Prime Minister Giuseppe Conte’s cabinet signed off on the budget outlook late Monday. Its baseline scenario forecasts that the economy will expand 5.1% in 2021, which might rise to 6% when taking government stimulus into account.

Rome’s administration forecasts a gradual decline in the ratio of debt to gross domestic product in the following years, targeting 151.2% in 2023, according to the document approved by the government. That is expected to fall below the pre-pandemic level by the end of the decade, it estimated.

Italy could face a new increase in hospitalization levels and be forced to impose restrictions that would bring the economy back into recession from the fourth quarter, according to the document. In that scenario, mass vaccine distribution wouldn’t start until the second half of 2021.

“With another lockdown the economic contraction could easily be 15%,” said Vincenzo Longo, analyst at IG Markets.

The outlook lays the groundwork for Italy’s 2021 budget, which must be approved by parliament by the end of the year. Conte’s government is struggling to salvage an economy ravaged by the pandemic and a strict national lockdown as it prepares tighter measures to counter a resurgence of infections.

The government also sets a goal of cutting Italy’s deficit to 3% of GDP by 2023, after seeing it balloon to 10.8% this year.

Italy is set to receive as much as 209 billion euros ($246 billion) in grants and loans under the European Union’s recovery fund. Finance Minister Roberto Gualtieri has pledged to disclose a “significant” long-term target for reducing the country’s crippling debt, which stood at 134.7% at the end of 2019.

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The government’s priorities -- in line with the EU fund plans -- include growth, reducing the social and economic impact of the pandemic, supporting a green and digital transition, and creating jobs, the outlook says.

Italy is struggling to bring its debt-to-GDP ratio under control, even the EU aid and European Central Bank support to help keep a lid on its borrowing. The government has already deployed 100 billion euros of stimulus to shield businesses and citizens from the crisis. A further 40 billion euros has been earmarked for 2021, according to Gualtieri.

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