Growth should pick up some steam in 2020, thanks to stronger domestic demand and a rebound in industrial production. However, Italy will lag behind its EU peers, weighed down by lackluster investment and muted productivity growth. Weak fiscal sustainability, political uncertainty and a reignition of financial turbulence cloud the outlook. FocusEconomics panelists project growth of 0.4% in 2020, which is unchanged from last month’s forecast, and 0.7% in 2021.
Italy Economic Overview
Italy is the world’s ninth biggest economy. Its economic structure relies mainly on services and manufacturing. The services sector accounts for almost three quarters of total GDP and employs around 65% of the country’s total employed people. Within the service sector, the most important contributors are the wholesale, retail sales and transportation sectors. Industry accounts for a quarter of Italy’s total production and employs around 30% of the total workforce. Manufacturing is the most important sub-sector within the industry sector. The country’s manufacturing is specialized in high-quality goods and is mainly run by small- and medium-sized enterprises. Most of them are family-owned enterprises. Agriculture contributes the remaining share of total GDP and it employs around 4.0% of the total workforce.
The country is divided into a highly-industrialized and developed northern part, where approximately 75% of the nation’s wealth is produced; and a less-developed, more agriculture-depended southern part. As a result, unemployment in the north is lower and per capita income in higher compared to the south.
Italy suffers from political instability, economic stagnation and lack of structural reforms. Prior to the 2008 financial crisis, the country was already idling in low gear. In fact, Italy grew an average of 1.2% between 2001 and 2007. The global crisis had a deteriorating effect on the already fragile Italian economy. In 2009, the economy suffered a hefty 5.5% contraction—the strongest GDP drop in decades. Since then, Italy has shown no clear trend of recovery. In fact, in 2012 and 2013 the economy recorded contractions of 2.4% and 1.8% respectively.
Going forward, the Italian economy faces a number of important challenges, one of which is unemployment. The unemployment rate has increased constantly in the last seven years. In 2013, it reached 12.5%, which is the highest level on record. The stubbornly high unemployment rate highlights the weaknesses of the Italian labor market and growing global competition. Another challenge is presented by the difficult status of the country’s public finances. In 2013, Italy was the second biggest debtor in the Eurozone and the fifth largest worldwide.
Italy’s Balance of Payments
Italy has been an international debtor in most years during the past decade. Following the financial crisis in 2008, Italy, like the other periphery countries, experienced a sudden stop in private capital inflows as the level of government debt became unsustainable.
Since Italy is part of the Eurozone, it cannot rebalance its current account by adjusting the exchange rate. As a result, the country entered a system of adjustment called TARGET2. TARGET2 replaced the private capital flows with public capital flows and allowed the troubled countries to run current account deficits and avoid balance of payments crises. This gave Italy the opportunity to gradually adjust its current account balance.
The current account deficit shrank from a 3.4% deficit in 2010 to almost zero in 2012. This adjustment mainly reflects a fall in imports while exports performed quite steadily. In addition, private capital flows have increased lately, as confidence in Italian sovereign bonds has improved. However, a positive balance was not seen until 2013, when the country incurred a current account surplus of 1.0%. The main contributor to the surplus was the trade balance. In fact, in 2013, trade balance incurred a surplus three times larger than in the previous year.
Italy’s Trade Structure
Against the backdrop of a weak domestic demand, the external sector’s performance is crucial for the Italian economy. One of the most important pillars of the economy is the production of high-quality products such as in the machinery, textiles, industrial designs, alimentary and furniture sectors. These products contribute substantially to the country’s exports. However, as a country poor in national resources, its energy and manufacturing sectors are highly dependent on imports. This makes Italy’s external position vulnerable to changes in import prices such as fuel. The county recorded trade deficits from 2004 until 2011. However, in the last two years, falling imports have helped to turn the balance into positive figures.
Italy’s trade volumes increased significantly after the country joined the Eurozone. Despite growing global competition, in 2013 Italy ranked as the world’s 10th largest exporter and 11th largest importer. Italy’s main trading partners are inside the Euro area, in particular Germany, which is the country’s main exports destination and accounts for around 12.6% of Italy’s total exports and France, accounting for 11.1% of total exports. Other important export destinations are the United States, with a share of 6.9% of total exports, and Switzerland with 5.2%. Germany and France are Italy’s top imports partners, accounting for 12.4% and 10.8% share of total imports respectively.
Exports from Italy
Since the country’s manufacturing sector is specialized in high-quality goods, Italy plays an important role in the global market of luxury goods. The country’s main exports are mechanical machinery and equipment, which account for around 24% of total exports, as well as motor vehicles and luxury vehicles (7.2%). Home to some of world’s most famous fashion brands, Italy occupies a special niche in the global market of fashion and clothing. In fact, exports of clothing and footwear account for around 11.0% of the country’s total exports. Other important exports include electronic equipment (5.6%) and pharmaceutical products (4.6%).
Since 2008, the country has experienced anemic growth in merchandise exports of 1.6% annually. In nominal terms, merchandise exports have gradually outsized imports, which caused the last two years (2012 and 2013) to close with a trade balance surplus.
Imports to Italy
Italy’s main imports are fuels, which account for around 17% of total imports. This is due to the country’s lack of natural resources, which makes it highly dependent on energy imports. Other imports include machinery (14.2%), raw materials (10.0%) and food (7.0%)— Italy is a net food importer because the landscape is not suitable for developing agriculture.
Since the financial crisis, merchandise imports have expended at a slower rate on average than merchandise exports. In fact, in the last six years merchandise imports have grown a meager 0.4%.