(Bloomberg) -- The odds are stacked against Matteo Renzi’s economic ambitions for Italy.
The prime minister needs to see a blistering pace in the second half of this year to meet his goal of a 1.2 percent expansion in 2016. Economists say that’s not happening, spelling trouble for Renzi and the wider euro area.
With Renzi facing a referendum in the autumn that could decide his political future, a stagnant economy and banks hobbled by bad debt are adding to his challenges. While cheaper oil, a weaker euro and unprecedented European Central Bank stimulus helped the Italian economy emerge last year from its longest recession since World War II, that can only take the recovery so far.
“Italy’s potential growth rate is, as of today, still zero if not slightly negative,” said Raffaella Tenconi, a London-based economist at Wood & Co. “Companies are still too indebted, profitability in the aggregate is very low and the economy overall is in a particularly challenging position having no fiscal or monetary-policy independence.”
Renzi’s government so far is standing by the 2016 growth projection it made in April, despite an economy that stalled in the three months through June. A constitutional reform referendum expected in November is rapidly turning into a test of the 41-year-old premier’s popularity, with unemployment that unexpectedly rose to 11.6 percent in June and a banking crisis that rattled investors large and small. Renzi has said he would quit if he loses the vote.
As the third-largest economy in the euro area, Italy is also holding back the region’s attempts to build dynamic, sustainable growth.
Italy’s stagnation in the second quarter highlighted Germany’s role as a pillar of the 19-member euro area. The German economy expanded 0.4 percent during the period, twice as fast as predicted, drawing its strength from domestic demand amid record-low unemployment and rising wages. The latest snapshot of the euro-area economy since the June 23 Brexit vote will be published Tuesday, with the results of the monthly survey among purchasing managers.
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Italian gross domestic product would need to expand 1.3 percent in the six months through December to meet Renzi’s goal for 2016, according to Bloomberg calculations based on data from Italy’s statistics bureau. That would be the fastest pace in 16 years, and mark a major acceleration for an economy seeking to rebound from the record-long slump.
Fabio Fois, European economist at Barclays Plc in Milan, said he doesn’t expect that kind of expansion. He foresees the continuation of a “modest and fragile recovery” while “headwinds stemming from financial market volatility and the unstable domestic political outlook are likely to exert a severe drag on domestic demand.”
Finance Minister Pier Carlo Padoan acknowledged on Aug. 12 that the forecast of 1.2 percent growth in 2016 “would be put into question” by the U.K.’s Brexit fallout, the international terror threat and the migrant influx. Padoan will issue an updated forecast next month.
Despite the recent data, Italian news agency Ansa quoted Renzi as telling an event in Tuscany on Sunday that he is still hoping for 2016 GDP expansion of as much as 1.2 percent, which would match the government’s April forecast.
Renzi was scheduled to meet Monday with German Chancellor Angela Merkel and French President Francois Hollande to discuss the European Union’s future following Britain’s decision to leave the bloc. The three-way summit was scheduled to take place aboard the Italian aircraft carrier Giuseppe Garibaldi in the Tyrrhenian Sea off Italy’s western coast.
Italian public debt reached 2.25 trillion euros ($2.55 trillion) in June while domestic banks’ gross non-performing loans totaled about 360 billion euros. The country’s poor gross domestic product performance will probably complicate Renzi’s effort to get a green light from the European Union to spend his way out of the morass.
To revive solid growth, the government would like to keep the deficit at 2.4 percent of GDP in 2017, instead of squeezing the economy to reduce it to 1.8 percent as agreed to with the EU, daily newspaper la Repubblica reported last week. Italy needs a deficit-to-GDP ratio of more than 2 percent to allow for an expansionary budget, Deputy Finance Minister Enrico Morando said in interview with newspaper Corriere della Sera published on Thursday.
“The amount of budget flexibility needed to relaunch Italy’s economy is not a matter of decimals, rather one of full points, something in the same region of 5 percent of GDP that other countries like Spain have been allowed by the EU,” said Alberto Bagnai, who teaches economics at Gabriele d’Annunzio University in Pescara.
Bagnai sees a need for increased civil servants’ salaries and infrastructure investment as well as more spending on health care and education.
“That would bring about a much-needed economic revival and eventually a reduction of the debt-to-GDP ratio,” he said. “The strategy of reducing the debt through budget cuts has clearly failed.”