Last week, with information available as of February 17, we published our Brief with a focus on quantitative information and assessments on the effects of the coronavirus on the global economy and Italy. We estimated the impact on our country at -0.1% of GDP as an effect of the fall in Chinese production and domestic demand on international trade, as well as on Chinese tourism in Italy. While the evolution of information regarding China are broadly in line with the estimates we made last week, in the last weekend (February 22/23) the picture has changed for Italy, due to the emergence of outbreaks of infection located in some areas of Lombardy and Veneto. This has led the authorities to take drastic measures, from the quarantine of the few towns at the epicenter of the infection to the closure of schools and many activities involving the gathering of people (football matches, bars, cinemas, etc.) in large areas of Northern Italy.
It is quite clear that any assessment of the economic effects is at this moment subject to a large uncertainty, since they depend crucially on the duration of the contagion and the measures to contain it. In the following, we have collected a few data in order to answer some questions.
Even assuming that national authorities will implement policies to support stressed businesses and that the situation will tend to normalize by mid-March, in the first quarter a contraction in GDP in the order of 0.3% is very likely (first quarter 2020 over the last quarter 2019; a downward revision of 0.4% compared to our February Brief projection) and, after the contraction already occurred in the 2019q4 (-0.3%), this implies a technical recession (two consecutive quarters of falling GDP). Italy is thus likely facing the fourth recession since 2009. Assuming a recovery in subsequent quarters, starting from Q2, in line with our earlier projections (see our mentioned February Brief), which implies that the loss in the first quarter is not recovered in subsequent quarters, GDP will fall by 0.3% on average for 2020 as well.
The value added of the regions affected (these are the regions where schools were closed during the week of February 24-28) makes up 54% of the Italy’s GDP, with the following details: Piedmont (7.8%), Lombardy (22.1%), Veneto (9.2%), Emilia-Romagna (9.2%), Trentino Alto Adige (2.6%), Liguria (2.8%). Going to provincial level, Lodi represents 0.4% of the national GDP while Milan 10.2%.
Focusing on Lombardy, the region most affected, total services account for 16% of the national GDP, 5.7% considering only commercial, tourist, transport, hotel and restaurants activities, the service sector probably most affected by the shutdowns.
Assuming for the sake of simplicity that GDP is produced uniformly over time, an average of 2% of annual GDP is produced in a working week. Consequently, assuming that 20% of the value added of the trade, transport, hotel and restaurant and tourism sector in Lombardy is lost for a week, the loss of GDP for Italy would be 0.025% in annual terms, but the fall in GDP in the first quarter could reach 0.1%. Obviously, this would add to the losses in the other affected regions, even though these would be smaller.
Soft data (PMI and firms’ confidence) collected before the outbreak suggested a mild recovery. If these underlying trends were to be confirmed, the industry could quickly recover any production stops in a few months. This recovery could be amplified by some restocking: while the uncertainty that characterized last year led companies to reduce inventories, which contributed negatively by 0.9pp to GDP growth, this year the process could move in the opposite direction. Services are different, as in many cases their use/consumption cannot be postponed: i.e. the tourism linked to the Venice and Viareggio Carnivals, or the losses due to the closed theaters, cancelled fairs, fashion shows and sport games without an audience, etc..
Needless to say, the more prolonged the acute phase of the infection will be, the more persistent the economic effects. In any case, it is likely that the tourism sector will be affected throughout the spring, with a slowdown in arrivals from abroad. In addition to the halt of Chinese tourism for this year, already considered in the estimates made for the Brief, we can expect a greater alert also for tourism (including business travel) from other countries: assuming a stop for a month and a zero yoy growth in the subsequent months, the additional negative effect on annual GDP growth would be 0.3%. This estimate would not include the further negative effects on domestic tourism.
The reaction of the financial markets, which had been very cautious until last week, has quickly changed signs and the Milan Stock Exchange lost almost 10% in four days. In addition, and despite the fears of recession lowered market interest rates, the spread between BTPs and Bund rose to around 170bps. Depending on how long these effects will last, both the negative impact on households' financial wealth and on confidence should be assessed.