Italy’s economy to shrink sharply this year, what comes next hard to gauge

The consensus among key economic observers is that Italy will emerge strongly from the economic slowdown that has held it since the emergence of the coronavirus pandemic earlier this year. But there is still no clear idea of how long it will take for that economic recovery to gain force.

The reports published over the last two months from 19 leading multilateral organizations, investment banks, economists, think tanks, rating agencies, and other observers predict Italy’s economy will contract by around 11 percent in 2020.

Before the coronavirus crisis, most observers the economy would grow by around 0.5 percent this year.

Among that group — which includes the International Monetary Fund, the Bank of Italy, the European Commission, the Italian National Statistics Institute (ISTAT), and the Organization for Economic Cooperation and Development (OECD) — the most optimistic model comes from the Italian industry association Confindustria, which predicted a 6-percent contraction compared to 2019. The least optimistic is the OECD, which had a model predicting the Italian economy could shrink by as much as 14 percent.

If even the most optimistic scenario plays out, it will be Italy’s most severe one-year economic contraction since the country emerged from World War II. The most severe negative growth before 2020 came in the wake of the world economic crisis, in 2009, when the economic growth rate declined to minus 5.3 percent.

Lorenzo Codogno, founder and chief economist of LC Macro Investors Ltd. and a visiting professor at the London School of Economics, said the severity of the current economic crisis makes it difficult for economic models to accurately predict what will happen over the coming months.

“The models don’t work because this is such an unprecedented crisis,” Codogno told Xinhua. “Nobody has ever seen anything like this before.”

Codogno himself predicted negative 13.3 percent growth for the year, more severe than the consensus of recent prognostications. But he also predicted 9.7-percent growth in 2021, a level not seen in Italy since the 1950s post-war economic boom.

“I think the economic recovery will gain traction next year, with a pickup in exports and industrial production,” Codogno said. “But a 9.7-percent growth rate won’t seem strong because the economy will be gaining back part of what was lost this year.”

In the first quarter of this year, ISTAT said the economy contracted by 5.3 percent compared to the same period in 2019, and preliminary estimates from domestic economic observers predict the economy will shrink by as much as 21.9 percent in the second quarter (that figure is from the retailers’ association Confcommercio) compared to the same period a year earlier.

According to Francesco Daveri, a professor of macroeconomics at the SDA Bocconi University School of Management, consensus estimates for a full-year economic contraction of around 11 percent are based on some recovery over the second half of this year.

“I think the coming months will include a visible rebalancing of the economy,” Daveri said in an interview. “It will not be the same across all sectors. For the tourism industry, this is a lost year, and some export sectors will continue to suffer as trading partners emerge from their economic problems. But I think we will start seeing positive signs in the second half.”