Italy’s central bank paints gloomy picture - ABN AMRO

"According to Italy’s central bank, the available cyclical indicators suggested that GDP growth slowed down to 0.1% qoq in Q3, down from 0.2% in Q2, mainly reflecting ongoing weakness in the industrial sector," note ABN AMRO economists Aline Schuiling and Bill Diviney.

Key quotes

"This slowdown in growth means that the risks surrounding Italy’s government finances have increased, as the government’s targets for the budget balance and debt ratio largely depend on a very favourable economic scenario."

"In its Economic Bulletin Banca d’Italia does not comment directly on the government’s 2019 Budget, but it regularly refers to the negative consequences of the tensions that have been building up in financial markets since the new government took office and presented its expansionary fiscal policy plans. For instance, it mentions that purchases of Italian portfolio securities by foreign investors in the early part of the year were followed by net sales between May and August. Indeed, during the period January-April foreign investors purchased EUR 42bn of Italy’s government bonds and subsequently sold EUR 67bn during May-August."

"The decline in holdings of Italian government debt by foreign investors went hand in hand with extra purchases by Italian banks, which raised their holdings of government debt by almost EUR 47bn during May-July. Also, the central bank’s report mentions that tensions in financial markets were reflected in the risk premium on bank bonds and a decline in bank share prices, and that the interest rate on new bank loans to companies rose slightly. On top of that, the Banca d’Italia’s quarterly Survey on Inflation and Growth Expectations (also published on 15 October) reveals that Italian companies have scaled down their investment plans since the start of the year, while their assessment of the conditions for investment has deteriorated. This implies that the weakness in economic growth could well last beyond Q3. Indeed, we expect growth of a little under 1% in 2019 – with risks to the downside – which is well below the government’s optimistic assumption of 1.5%. (Aline Schuiling)."