Italy: Keeping Calm and Carrying On
Despite familiar challenges, risks to Eurozone stability remain contained
· BTP-Bund yield spreads have tightened this year as the government has set about tackling its fiscal gap without drama; France is instead the new focus of market jitters
· Finance Ministry sees budget deficit narrowing to 3.8% of GDP this year from 7.2% in 2023; expects to bring it below the EU’s 3% of GDP ceiling in 2026, at 2.8%
· Government plans to raise €3.5 billion from banks and insurance companies in its 2025 budget, mostly by suspending banks’ DTA deductions; measure met with calm by markets, unlike aborted attempt to impose levy on bank profits last year
· GDP growth has been sluggish, closely tracking that of the euro area as a whole since the pandemic
· Strong headwinds to growth and revision of historic series data make government’s 2024 GDP growth target of 1%YoY unlikely
· GDP growth in Q2 slowed to 0.2%QoQ from 0.3%QoQ in Q1; if Italy maintains 0.2%QoQ growth rates in both Q3 and Q4, then 2024 growth would come to 0.6%YoY
· Near-term downside growth risks dominate; composite PMI fell below 50-threshold in September as manufacturing activity contracted at a faster rate
· Headline HICP in September dropped to 0.7%YoY, below euro-area average of 1.7%YoY
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