MNI SOURCES (RPT): Italy In Danger Of Technical Recession

(Repeats article first published on April 13)

Italy is passing through “key weeks” if it is to avert economic contraction in the second quarter, triggering a technical recession, a source in the Department for Economic Policy Planning and Coordination told MNI, while a Finance Ministry official acknowledged that dodging a recession could be a “close call”.

While the government said last week that it expected a “moderate recovery” in the second quarter driven mainly by services, there is a risk that the rise of energy prices could trigger a significant drop on industrial output and consumption, the Planning and Coordination source said. Italy’s economy contracted by 0.5% in the first quarter.

A source in the Finance Ministry acknowledged the danger of a recession, defined by two consecutive quarters of contraction, but added that calls by political parties and business lobby Confindustria for more government help to deal with energy prices were self-serving. Confindustria says a substantial number of companies have reduced or stop production and forecasts the economy will contract in both Q1 and Q2.

The government is not for the moment planning any more measures following EUR5 billion in additional spending announced last week, the Finance Ministry source said.

Easter tourism could still provide positive economic news and keep the economy in the black during the second quarter, the source said, adding that “reservations are good so far and we could receive a lot of foreigner visitors” compared with the last two years.

INFRASTRUCTURE DELAYS

But the war in Ukraine is a major source of uncertainty, with an interruption of Russian gas imports and more sanctions on Moscow both possible, the source conceded.

A drive by Italy for European Union action to cap natural gas prices is unlikely to produce results before the third quarter, while the positive impact on growth of NexGenerationEU infrastructure spending is being reduced as higher energy prices cause project delays, the source added.

Leaders of the political parties backing the national unity government are openly pressing Prime Minister Mario Draghi for more spending.

Draghi faces a difficult meeting on Wednesday with right-wing League leader Matteo Salvini and Forza Italia deputy Antoni Tajani, who want tax cuts as well as more expenditure. The centre-left Democrats, generally supportive of Draghi, are also calling for the government to act fast in the face of the “terrible risk” of recession.

Last week the government said it expected growth of 3.1% this year, though this would slip to 2.3% if imports of Russian gas were stopped. In its economic bulletin, the Bank of Italy saw a baseline scenario of 3% growth, but a 0.5% contraction in 2022 if Russian gas supplies are halted.