Bleak medium-term outlook for Italy’s economy

As the crisis of Italy’s banking sector with several banks in real difficulty remains acute, a number of indicators brought further concern about Italy’s global economic outlook. Consumer confidence has decreased constantly since January 2016 and has impacted the manufacturing industry whose inventory has grown.

The headline Markit Italy Manufacturing PMI came in at 49.8 in August 2016 from 51.2 in July 2016, missing market consensus of 51.1. It was a 20-month low since December 2014, as a reduction in new orders led to weaker growth in both output and employment. On the other hand, August 2016 saw a further decrease in retail sales across Italy, although the pace of contraction eased to the slowest for three months; and Italian services companies recorded the fastest rise in business activity for six months.

These two facts in addition to relatively good but disparate export figures have helped to keep Italy’s economy afloat. However, beyond the statistics, the general situation looks quite bleak in the medium term as Italy’s GDP in Q2 2016 confirmed stagnant at just 0.8% YOY compared to 1.0% in the previous quarter.

Consumer spending and investment have reached such low levels that they barely contributed to Italy’s sluggish economic growth. The situation has become serious enough for many analysts to wonder if and when Italy comes back into the economic recession that ended in 2015. Any additional negative factor could now turn Italy’s economic situation into a serious headache for the euro area as whole, especially in case of increased tension in the banking sector.