December 2019 Quarterly Economic Outlook - Highlights

Global outlook between ups and downs: Italy’s budgetary policy boost GDP growth by 0.1%


Between declining trade tensions and European industrial production at deadlock, Italian economic policy is uncertain and the improvement suggested by the economic indicators might disappear in the absence of further structural measures to support growth.


Below are the main forecasts included in the December 2019 Quarterly Economic Outlook:

  • Italian GDP slightly revised upwards for 2019, +0.2% (from 0.1% of September), and downwards for 2020, +0.5% (from +0,6%), due to the increase in economic uncertainty
  • The budgetary policy will be moderately expansionary, supporting a 0.1% rise in GDP in 2020: the increased expenditure will be covered partially by higher taxes. Prometeia forecasts a deficit to GDP ratio of 2.3% (current official estimate: 2.2%)
  • The global context (2019 GDP: +3%; 2020 GDP: +2.6%) shows signs of stabilization thanks to economic policy support, easing of trade tensions, resilient consumption and corporate profits 
  • In the US (2019 GDP: +2.3%; 2020 GDP: +1.5%) and China (2019 GDP: +6.2%; 2020 GDP: +5.1%) economic policies will have increasingly less room for manoeuvre. Public debt in the USA will reach more than 110% in 2020 and in China total debt has already reached 300% of GDP
  • In the Euro area (2019 GDP: +1.2%; GDP 2020: +1.1%) modest growth is confirmed. The manufacturing sector continues to struggle, with production dropping especially in Germany, where a moderate expansionary fiscal policy is expected in 2020
  • To reduce tensions in the US interbank market, the FED increased its balance sheet by more than $240 billion, reversing the downward trend that started at the end of 2017. Christine Lagarde began her term as President of the ECB following the line set by Draghi
  • The increase in US tariffs on Chinese products has led to a moderate trade diversion effect, in favour of Italy and Germany, for mechanical and automotive sector products

Italy: slowly moving forward with less room for manoeuvre

Despite 4th quarter 2019 contraction in industrial activity, which was predicted by Prometeia’s nowcasting models, GDP growth will close at +0.2% (compared to +0.1% forecast in September), thanks to the Italian National Statistics Agency’s data revisions, while the 2020 estimate has been revised slightly downwards. Political and economic uncertainty are increasing: majority disagreements and unresolved issues such as Ilva and Alitalia are the main causes. Support for growth in 2020 will come not from a real expansionary fiscal policy, but from a reshuffling of budget items. Households will benefit from the redistributive effects of certain new measures (such as the reduction of the tax wedge and some transfers) and from the Citizenship Income (Reddito di Cittadinanza). The latter, which will be fully operational in 2020, increased transfers in 2019 by €3 billion compared to the Inclusion Income (Reddito di Inclusione). A slight boost, in addition to consumption, will come from investments: tax credits, increased deductions for ecobonuses and restructuring. Not until 2022 will GDP growth recover (to +0.9%), and will not reach pre-crisis levels for all the main macroeconomic indicators.


International scenario: the fog clears

US-China talks have restarted talks which has alleviated global tensions, with financial markets betting on agreement between these two great powers. However, there are still conflicts involving other countries which are contributing to keeping world trade growth relatively low: Prometeia estimates a recovery in the last months of 2019, but this year will close in a condition of substantial stagnation (+0.3%, +1.4% in 2020). On the economic policy front, the US and China are running out of room for manoeuvre: the US federal budget deficit will reach 4.2% of GDP at the end of the year and debt is expected to exceed 110% in 2020. In China, total debt has reached 300% of GDP.
In Europe the situation is different: industrial production is falling, but there are several countries, such as Germany, that have ample fiscal space to stimulate growth. Germany has planned a reduction in public savings of 0.4 percentage points in 2020, not so much via increased investment, but rather through a mix of aid and tax reliefs for households and businesses.
Central banks: since mid-September, the FED has intervened by injecting into the US interbank market, liquidity of over $240 billion. Temporary interventions have been announced, but they leave open the question of US monetary policy evolution. In Europe, the incoming President Lagarde has confirmed the ECB's monetary policy guidelines, reiterated the importance of completing banking union and capital markets union along with the need for a more significant contribution from fiscal policy. A review of the monetary policy strategy will be concluded in 2020.


USA vs China: will the Eurozone benefit? Not really

Prometeia analysed whether American duties on products imported from China have favoured Eurozone exports. The main Eurozone countries have seen an increase in exports since the beginning of 2019, but this cannot be traced back to the "trade diversion" effect: the European products that have increased the most were not replacing Chinese products subjected to higher duties. Rather, it seems that these products reacted to different shocks such as fear of higher US tariffs in the future. Only a few products from the mechanical and automotive sectors have benefited significantly from trade diversion effects: in this context, manufacturing specialization has benefited Germany and Italy in particular.