Italy: Slowing economy complicates the policy environment – Standard Chartered

Christopher Graham, Economist at Standard Chartered, notes that Italy’s recent business data have been disappointing, underlining the deceleration in the Italian economy since Q4-2017.

Key Quotes

“This comes as Italy’s Eurosceptic governing coalition begins internal budget negotiations, raising the prospect of a confrontation with the European Commission (EC) in the autumn.”

“These developments have led to a resurgence of Italian financial market volatility, with sovereign bonds and bank stocks displaying renewed volatility since late July.”

“With the euro-area economy also decelerating from its Q4-2017 peak, and global trade tensions continuing to ratchet upwards, the conclusion of the QE programme at the end of this year could be a substantial test for Italian financial markets and policy makers.”

“Italy’s budget negotiations are unlikely to proceed smoothly over the next couple of months, given the differences of opinion both within the government, and with the EC.”

“Our core scenario remains for a gradual introduction of the governing coalition’s budget reforms (Lega’s flat tax and M5S’s universal basic income) over the next few years, with some policy elements watered down, or left out entirely.”

“The Commission will also see the merit in compromising with Italy to avoid the risk of stoking anti-euro sentiment.”

“At this stage we cannot rule out early elections or ECB support to counter significant market disturbances, but these remain tail risks for now.”