Italy to Keep Underperforming Peers After 2019 Stagnation

(Bloomberg) -- Italy’s economy will underperform its euro peers in the future after stagnating this year, even after the European Central Bank’s loose-money policies significantly reduced its borrowing costs, ECB Governing Council member Ignazio Visco said on Friday.

“Despite the slight improvement in the first quarter of this year, economic activity in Italy is stagnating, above all because of the loss of strength of the industrial cycle,” Visco said in Milan at the annual meeting of the Italian Banking Association. “To further reduce the cost of debt the longer-term prudent course of fiscal policy will need to be confirmed.”

Italy narrowly escaped European Union discplinary action for failing to keep its debt in check and faces a bruising battle over its 2020 budget after its de facto leader, Deputy Premier Matteo Salvini, vowed to carry through with his promise of big tax cuts. Yet, amid global trade tensions and slower growth in the euro area, the country’s economy probably shrank again in the second quarter, the country’s statistics office has warned.

Visco, who is also Bank of Italy governor, expects that Italian output will barely budge in 2019 with a 0.1% expansion and pick to just under 1% on average for the next two years. The European Commission forecast the euro area to expand 1.2% in 2019 and 1.4% in 2020.

Despite the gloomy economic outlook, the expectation of renewed monetary easing from the ECB has helped push yields on Italian bonds to the lowest level in almost three years while narrowing the spread of German bunds well below 200 basis points.

Visco’s view is while this reduction will make it easier to cut debt and to restart sluggish credit growth, it’s still higher than the “not low” levels recorded in April 2018, before the populist government was formed by Salvini and fellow Deputy Premier Luigi Di Maio of the Five Star Movement.

Finance Minister Giovanni Tria is more optimistic about Italy’s growth prospects. “The trend of the Italian economy is overall satisfying from the start of the year,” Tria said in a speech at the Milan event.

Still, he acknowledged there are “downside risks” to the government’s forecast for 0.2% GDP growth this year.

©2019 Bloomberg L.P.

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