Italy: Mixed sentiment after the government was formed

Even in the run-up to the actual formation of the government the proposals by the Lega and the Five Star movement as regards repealing structural reforms and the barely affordable fiscal and expenditure plans had caused real uncertainty in the financial markets. This was seen, for example, in the swift and clear rise in the yield differential between Italian and German government bonds. The signal was obvious: clear scepticism toward the new government.

With the government now formed the first survey-based economic indicators for Italy have been released. Both economic confidence and the purchasing manager indices have improved. The sub-components of economic confidence indicate that private households are more upbeat as regards their future financial and economic situation. Retailing and parts of the service sector expect better business opportunities going forward. The suspension of what was actually a firmly planned increase in VAT in the coming year may have impacted favourably on expectations.

Despite improvements in sentiment among purchasing managers overall, business expectations both in industry and in the service sector slipped. In fact, in some parts there are concerns about the political stability of the country. A buoyant sense of a new start looks somewhat different. Overall, the state of the indicators fits our weak forecast for Italy. With growth of 1.1 percent this year, Italy remains the backmarker in the Eurozone. Next year, the figure could be slightly higher at 1.3 percent if parts of the expansionary expenditure plans are actually realised, yet this will be at the cost of very high state debt.

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