Quarterly Economic Outlook March 2020 - Highlights

Covid-19, Prometeia forecasts

Prometeia's Quarterly Economic Outlook - March 2020 - Highlights
  • Italy’s GDP 2020: -6.5%
  • After the damage inflicted in 2008-2009 and the 2011-2012 crises, Italy will lose another important chunk of growth
  • By end 2020, the debt to GDP ratio will reach 150%. In the medium-term, Italy will have to live with very high levels of public debt. What will the consequences be?
  • There is a need for a European plan to tackle the emergency and the recovery, otherwise the future of Europe will be at risk

In the context of the deepest global recession since World War II, Italy risks being among the worst hit countries due to the nature of its productive structure: reliance on a service and tourism sector characterized by small and medium-sized enterprises, and a public sector with already high debt. No country will be able to overcome this crisis on its own. Prometeia foresees a need for a strong and timely plan at the European level, to tackle the emergency and to relaunch economic activity, not only from a financial point of view but also in terms of real growth. After the 2008 financial crisis, Italy lost important growth has never fully recovered. The current crisis will result in Italy losing another significant chunk of growth and, in the future, may be able only to partially recover what will be lost in 2020.

  • Assuming a slow and selective easing of the lockdown starting from the beginning of May, Prometeia forecasts a contraction of Italian GDP in 2020 of 6.5%. There will be only a partial rebound towards the autumn, leading to +3.3% in 2021 and +1.2% in 2022.
  • ECB monetary policies will ease the tensions on Italian bonds in the short term, but government fiscal intervention can provide only limited support for demand; by end 2020 the deficit to GDP ratio will have reached 6.6% and the debt to GDP ratio will be 150%. In the medium term, Italy will have to live with a high deficit level (it will only return to below the 3% threshold in 2022).
  • In 2020, global GDP growth will be -1.6% including -9.4% international trade in goods. In 2021 and 2022, global growth will be 4.6% and 3.3%, respectively.
  • Maintaining macroeconomic stability in the Eurozone (2020 GDP -5.1%; 2021 GDP +3.4%), not just in Italy, will require strong and coordinated responses at the EU level. This could include financing higher expenses with European bond issues and creating a safe asset, which could also facilitate risk diversification at the European level.
  • In China, GDP will fall by 6.7% in the first quarter of 2020, but with a yearly average increase of 3.2% based on the expected recovery in the second part of the year.
  • Even with the largest economic stimulus plan ever approved, US GDP will fall by 2.5% in 2020, rising by 3.6% in 2021.

Italy is among the most fragile countries, a European plan is necessary

In the baseline scenario, assuming a slow and selected easing of the lockdown from the beginning of May, the fall in Italian GDP in 2020 will be at least 6.5%, an equivalent magnitude to the 2008-2009 recession, but in just one year. Prometeia estimates that, in the first two quarters of the year, there will be a reduction in GDP of more than 10% compared to the pre-crisis situation, with very large sectoral differences: from -10% in manufacturing to -27% in tourism-related services, and up to -16% in transport services and entertainment activities.

Despite the fiscal measures already announced (amounting so far this year to more than 2% of GDP), which are substantial, but limited by the high public debt, the depth of the recession and the slow recovery will only further weaken the country's productive capacity and public finances. In Prometeia's baseline scenario, Italy’s GDP level in 2022 will still be more than 2% below its 2019 level, with sovereign debt rising to 150% of GDP.  

In this context, macroeconomic stability can only be ensured in a framework of increased sharing of the risk at the European level from the health crisis and its effects. The symmetrical and exogenous nature of the shock, requires a common response both to cope with the increase in expenditure linked to immediate needs and to support recovery of the real economy. No country can weather this crisis alone. Financing these expenditures with European bond issues would reduce the burden on national budgets and be a step towards creation of a European safe asset that could help financial systems to diversify risk.  If we do not take this path, the whole European project will be at risk.


Real shock, global recession

While the crisis ten years ago broke out in the financial sector, the nature of today’s shock is real (lockdown and quarantine). In this first phase, it is affecting services in particular, which represent the largest share of value added in developed countries, with a higher share of employment with respect to manufacturing and where lost sales are harder to recover. The real and global nature of a crisis that hits services first leads to high multiplier effects linked to international trade, making reductions in activity particularly intense.

Despite all the uncertainties linked to the duration and intensity of the lockdown and the subsequent reactions of countries trying to recover, Prometeia estimates a global economic recession in 2020 (-1.6%), which will affect that industrialized and other countries, with only China avoiding a downturn thanks to the positive rebound expected in the second half of the year.  For comparison, in the Great Recession of 2009, the drop in global activity was 0.4%. The pull from Beijing's recovery and an expected return to "almost normality" by the end of the year in all industrialized countries leads to a forecast fall in world trade of “only” 9.4% for the year. In 2021, the global economy should rebound by 4.6%.

Finally, in the US an unprecedented relief package worth $2,000 billion (9.3% of national income, more than Italy’s GDP) has been approved to help businesses and families. In the US, GDP will fall by 2.5% in 2020 before recovering by 3.6% the following year.