The EU fund may help, in the short and long term, and in terms of the grants presented to Italy and the signaling effect of such a big step forward in EU fiscal coherence.
The Italian economy is facing certainly one of its darkest hours in modern history. After shrinking by 5.4% y-o-y within the first quarter, it's looking for a significantly larger contraction in Q2. In April, arrivals at tourist accommodations were down 99% when compared with last year, car sales contracted by 98% y-o-y, retail sales by 29%, industrial production with 47% and construction production by 68%. And while scarcely available data shows that May and June have been less bad -which is sensible as non-essential production sites and stores were allowed to reopen, albeit with restrictions. Industrial production shrank by 31% compared to the same quarter last year and car sales by 57%.
Starting from the second half of the year, there is room for any 'technical' recovery. The straightforward proven fact that stores and restaurants have reopened, and people are again able to spend as opposed to being confined to their homes, for example, will result in more spending. Moreover, the fact that since 3 June, the country again welcomes foreign tourists from the EU, Schengen and the UK, is likely to lead to at least some tourist inflow, instead of negligable throughout the largest area of the spring. However, many factors, associated with both supply and demand side shocks are holding back the recovery .
All in all, we project the economy to contract by 11.5% this year and to grow by 7% next year. Lots of people believe the economy will not have recovered losses before 2025, no more our forecast horizon. This forecast is based on the idea that a COVID-19 vaccine will not be available prior to the other half of next year, implying social distancing rules will remain in place until then.
Room for recovery
The Italian economy will likely grow rapidly in the third quarter. Yet if we look passed this so-called technical recovery, an italian man , recovery faces many hurdles.
While many containment measures have been lifted, social distancing rules still persist. This has an impact on the broad range of activities, for example in the hospitality sector. We've estimated that about 17% of Italian jobs can't be done from home or while keeping a 6 foot distance. Moreover, even if in writing jobs can be done from home, weak digital advancement hampers that possibility, at least partially. Second, despite the fact that the country is again welcoming desperately needed tourism, international tourism is expected to stay muted. Which is very troublesome for the economy, considering that 1 / 2 of its tourists are foreign , our prime season is coming and tourism contributes to 13% of GDP . Third the main contraction within the first 1 / 2 of this season brings along a large domestic demand shock despite large fiscal support measures. To date, the government has approved fiscal support packages worth around EUR80 billion (4.6% of GDP), including healthcare investment, short-time work-schemes, income transfers, tax deferrals, and moratoriums on loan repayments and utility bills. Moreover, the government is issuing guarantees on loans to some wide range of businesses covering at maximum between EUR700 and EUR750 billion loans. According to the European Commission, the contingent liability for that government arising from these guarantees would, at maximum, be EUR430 billion euro.
The recovery fund
The EU recovery fund may help, in the short and long run, and in the grants presented to Italy and the signaling effect of these a large advance in EU fiscal coherence. The latter could help to suppress bond yields. Based on the proposal along with a suggested distribution key, the European Commission has forecasted the fund could raise the EU27 GDP level with 1.5-2.25% by 2024, depending on assumptions made around the take-up rate for the loans. For the country group that includes Italy, the estimate ranges from 2.8% to 4.2%.
