2018: Italy the weak link once again

Consensus said:

Bloomberg's survey on Italian GDP growth showed a consensus for 1.2-1.3%. 

We said:

Italian capex remains the weak link in euro area. Unlike the other major EA economies, Italy’s capex growth is almost entirely attributable to business investment. The good news is that all the marginal growth of business capex in Italy from the second half of 2017 to 2018Q2 has come from other machinery and equipment – the first positive development since the Global Financial Crisis. Transportation equipment, actually slowed over the same period. Unfortunately, investment in other machinery and equipment stalled altogether in Italy. 

We are not surprised. In effect, potential, future public spending is already crowding out private investment via the credit channel through higher lending rates and marginally tighter lending conditions. Moreover, other factors directly related to government policies are likely to be at work; for example, the uncertainty about the extension of the favourable depreciation regime for firms’ investment in capital goods and the recent decision to cut on the so-called “Industry 4.0” package – which has supported capex expansion in the past years – will likely weigh on businesses’ investment decisions. Slower operating profits will be a headwind too.

Outcome:

Capex failed to pick-up and Italian growth continued to underperform. 

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