Perspectives

A moderate recovery, in a mixed scenario

rd  
14  
EcoPerspectives // 3 quarter 2019  
economic-research.bnpparibas.com  
Italy  
A moderate recovery, in a mixed scenario  
In Q1 2019, Italy came out of recession. The overall scenario remained mixed. The GDP annual growth rate was negative. Imports  
strongly declined and exports slightly increased, with a positive contribution of net exports. Both households and firms remained  
cautious, postponing consumption and investment. Cyclical indicators suggest a disappointing evolution in coming months, making  
more challenging the fulfilment of public finance objectives. The Italian Government approved an update of the 2019 Budget, with the  
public deficit around 2% of GDP, reaching an agreement with the European Commission and avoiding the disciplinary procedure.  
In Q1 2019, Italy partly recovered from a mild recession in the  
second half of 2018. Although real GDP rose by 0.1% q/q, the  
annual growth rate was negative (-0.1%), for the first time since  
1- GDP growth and inflation  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
2
013. The breakdown of GDP data was mixed. The 0.5% net  
exports contribution mainly reflected the contraction of imports (-  
.5%). Italian sales abroad rose by 0.2% q/q. In Q1, domestic  
demand added 0.2% to the overall growth, while stocks subtracted  
.6%. Value added of construction rose by 2.4% q/q, despite activity  
1
.8  
1
1.3  
1
.2  
1.2  
0
.9  
0.9  
20  
0
.7  
0
0
.3  
remaining feeble, as signalled by the evolution of new building  
permits. Value added of services declined by 0.2% q/q, with a  
significant contraction in the financial sector and in that of  
professional activity, while manufacturing recorded a slight increase.  
0.2  
20  
-
0.1  
1
6
17  
18  
19  
16  
17  
18  
19  
Source: National accounts, BNP Paribas  
The immediate outlook is gloomy  
Despite the moderate recovery in Q1, expectations remain uncertain.  
Business confidence worsened, hovering around the lowest level in  
the last four years. Italian firms remain extremely cautious. In Q1  
2
- Italy: real GDP  
y/y, q/q (% change)  
2019, the 0.6% increase in investment was the result of higher  
expenditures on construction, while that on machinery and  
equipment and that on means of transport declined by 2.2% and 5%  
q/q. Production fell both in March and in April, with a bigger decline  
in machinery and equipment sector, in metal products and in the  
transport sector.  
3
2
1
0
-1  
-2  
-3  
-4  
-5  
The worsening of confidence also affects Italian consumers, with a  
negative effect on private spending. This happened despite signs of  
improvement in the labour market, with the unemployment rate  
falling to 9.9% in May. In Q1, despite a 0.9% increase of purchasing  
power, consumption rose by only 0.1% q/q, as households  
increased their savings rate to 8.4%.  
-6  
-
-
7
8
2
008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019  
As cyclical indicators disappoint, it will be more challenging for the  
government to reach its public finance objectives. In June, the  
European Commission stated that Italy was experiencing excessive  
macroeconomic imbalances. The Italian Government approved an  
update of the 2019 Budget, reaching an agreement with the  
Commission and avoiding the disciplinary procedure. In 2019, the  
public deficit is expected to be around 2% of GDP, about EUR 7 bn  
lower than previous estimates, benefiting from higher revenues and  
lower expenditures.  
Source: Istat  
made significant new capital injections, while cutting debts. The  
improvement of the financial structure was also the result of the  
cleansing which occurred during the crisis leading to the  
disappearance of weaker companies. In 2018, value added of firms  
reached the highest level in the last twenty years. Besides, firms  
benefited from lower interest expenditure, as the rise of Government  
bond yields has not yet impacted the cost of credit. In 2018, the  
average cost of financial debt was 1%, from more than 6% in 2008.  
Italian non-financial corporations also took advantage from the  
decline of tax payments, with a saving of more than EUR 20 bn with  
respect to 2007. Despite these improvements, the recovery of  
Firms have improved their situation over the long run  
Economic and financial conditions of Italian firms have improved. In  
018, the leverage ratio was around 40%, about 9 percentage  
points below the 2011 level. Benefiting from tax incentives, firms  
2
rd  
15  
EcoPerspectives // 3 quarter 2019  
economic-research.bnpparibas.com  
profitability is still disappointing, as labour costs increased more  
than value added. In Q1 2019, the gross operating surplus to value  
added ratio declined to 40.7%.  
3
- Foreign travellers expenditure  
(2018; % of total)  
South and  
Islands  
14.7  
Tourism: a support for the economy  
North East  
6.8  
2
In 2018, international tourism turnover amounted to EUR 1,226 bn,  
2.9% compared to 2017. United States continued to be the country  
+
with the highest receipts. The market share of Italy grew slightly,  
reaching 3.4%, the sixth highest value in the world after those of US,  
Spain, France, Thailand and the United Kingdom. In 2018 total  
expenditure by foreign travellers to Italy rose by 6.5%, amounting to  
about EUR 41.7 bn (a little slowdown after +7.7% in 2017) while the  
number of visitors increased by 3.7%. International tourism receipts  
account for 2.4% of GDP in Italy, 8% in Greece and Portugal, 5% in  
Slovenia and Spain. The Italian value is lower than the average of  
both the European Union and the Euro area. According to balance  
of payments data, in Italy international tourist receipts account for  
about 40% of total exports of services and about 7% of total exports  
of goods and services. The balance of travel, which is structurally  
positive, reached EUR 16.2 bn. The surplus of Italy's tourism  
balance in relation to GDP is higher than the European average and,  
among the main Euro area countries, it ranks second after the  
Spanish one.  
Centre  
29.7  
North West  
Unassigned  
1.8  
27  
Source: BNL calculations on Bank of Italy data  
particularly strong in North America, and especially in the United  
States.  
The tourism sector in Italy is characterized by the presence of small  
and very small firms. According to Istat in 2016, around 97% of firms  
in this sector employed less than 10 persons (compared to 95% in  
the total industry and services). Firms with 20 or more employees  
only represent 0.9% of the total (compared to 1.8% in industry and  
service sectors). However, the presence of multinational hotel  
chains and other tourist services, including transport services,  
supplied by foreign companies operating in Italy is significant.  
Foreign invested enterprises in the tourism sector in Italy employ  
The growth of the tourism sector in Italy has been taking place since  
the end of the international financial crisis: valued at current prices,  
in 2018 international tourism receipts were almost 50% higher than  
in 2009, while spending of domestic residents travelling abroad was  
25% higher than in 2009. Overall, in 2015 (the last year for which  
6
.1% of total employees in the sector and produce about 14% in  
these data are available), tourism-related industries in Italy  
represented 5.9% of the total value added of the country.  
terms of both the added value and the turnover. In the 2012-2016  
period, firms in the tourism sector recorded a positive performance:  
their value added increased by 12.5% in nominal terms, against a  
change in the broader service sector of +11.2% and of 8.8% in the  
total industry and services. The increase in the value added in the  
tourism sector was due to a marked decline in the costs, rather than  
to an increase in firm’s turnover.  
Visitors from the Euro area contributed the most to 2018 growth,  
both in terms of number and tourism receipts. Germany, along with  
the United States and France, is still the largest importer of Italian  
tourism services. Spending by German tourists in Italy rose by 8.2%  
y-o-y, those from France and United Kingdom by 9% and 17.2%  
respectively. These three countries generate over a third of total  
Italy's tourist revenues. Outside the EU, US is the largest importer of  
tourist services from Italy.  
Paolo Ciocca  
paolo.ciocca@bnlmail.com  
The regions of the center of Italy, with a higher tourist appeal due to  
the presence of a large number of art cities, are still the favourite  
destinations of foreign travellers, with almost 30% of total arrivals in  
2018. The Southern regions and the islands reached a 15% share  
of total arrivals from abroad. This last area, despite the progress  
made in recent years, still presents a gap between international  
tourism revenues and the “tourism potential”. In the south of Italy  
and the islands are indeed located about three quarters of the Italian  
sea coasts and national natural parks; these regions also host a  
large number of museums and archaeological sites.  
In 2018 foreign travels of Italians amounted to 65.7 million, with an  
expenditure of EUR 25.5 bn (+1.8% and +3.8% respectively  
compared to 2017). The expenditure of Italian travellers who visited  
other countries in the Euro area grew more than the average in  
three countries: Greece, Spain and Germany. Among the  
destinations outside the European Union, the trend in spending was  
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