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Italy recession: Gas dependence, falling consumer spending weigh on Europe’s biggest struggler

By Fitri Wulandari

Edited by Georgy Istigechev

19:11, 16 November 2022

 Italy’s PM Giorgia Meloni gestures during a press conference in Rome on November 11 2022.
With energy costs and inflation rising, the world’s eighth-largest economy is slated to fall into a recession – Photo: Alberto Pizzoli / AFP via Getty Images

After experiencing faster-than-expected economic growth during the warm summer months, Italy's economy is facing a bleak winter.

High energy prices, which have led to high inflation and curtailed consumer spending, and mounting debts are some of the issues that the administration of newly elected Prime Minister Giorgia Meloni must address.

Will Italy’s recession happen soon? We examine Italy’s past and current economic indicators and analysts opinions on Italy’s economic outlook.

What is a recession?

A recession is a period of decreased economic activity, while a “technical recession” typically refers to a decline in the gross domestic product (GDP) – the total of all goods and services produced in a country – of at least two consecutive quarters.

The International Monetary Fund (IMF) has noted that a recession is present when a country's GDP declines by at least 2%, though in severe recessions the output drop can reach almost 5%.

In a recessionary economy, the unemployment rate rises while inflation falls as the overall demand for goods and services is reduced. Exports and imports tumble during periods of slowing activity. Industrial production and investment see much steeper declines than GDP, while consumption experiences modest declines.

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Is Italy in a recession?

Italy has been familiar with economic crises. Data from Macrotrends showed the country’s economy recorded a drop for more than two consecutive quarters at least seven times between 1962 to 2021.

Data from the Italian National Institute of Statistics (Istituto Nazionale di Statistica, or Istat) showed that Italy’s economy consistently grew below 1% from Q2 2018 to Q3 2019. Italy’s recession began in Q4 2019 and lasted a year until Q4 2020.

The lowest economic growth was recorded in Q2 2020 at -17.90% as Covid-19 pandemic restrictions hit the country’s economy, Italy's recession history data from Istat showed. Italy was the first country in the world to impose a nationwide Covid-19 lockdown in March 2020, restricting travel in and out of the country to curb the spread of the disease.

The country's economy recovered to positive growth in Q1 2021 and emerged from recession in Q2 2021, with economic growth reaching 16.7%. In the third and fourth quarters of 2021, the country's economic growth decelerated to 4.8% and 6.6%, respectively. However, growth was higher than the pre-Covid level.

In June 2021, the European Union approved Italy’s Recovery and Resilience Plan to help the country overcome the economic crisis caused by the pandemic. The plan consists of 132 investments and 58 reforms that must be completed by 2026. The EU will provide €68.9bn in grants and €122.6bn in loans to support the investments and reforms.

A preliminary Istat estimate on 31 October showed the economy advanced by 2.6% in Q3 2022. It slowed from a revised 5% GDP growth in Q2 2022 and 6.4% in Q1 2023.

On a quarterly basis, Italy’s GDP was estimated to grow by 0.5% in Q3, slowing from 1.1% in Q2 2022. Istat did not provide a breakdown of sources of growth in Q3.

The European Commission’s Autumn 2022 Economic Forecast released on 11 November said the following of Italy’s economy:

“The reopening of the economy, after lifting all pandemic-related restrictions, and policy measures to mitigate the impact of high energy prices on firms and households contributed to solid output growth.”

Paolo Pizzoli, ING’s senior economist for Italy and Greece, said on 31 October that the GDP estimates showed Italy managed to avoid a contraction in Q3 with tourism as the main growth driver for the quarter.

However, in its October monthly report, Istat warned that the outlook for Italy’s economy was expected to worsen due to rising inflation charged by high energy prices and a worsening economy in the Eurozone.

Factors causing recession in Italy

Before we look at Italy’s economic forecast for 2022 and beyond, let’s consider factors that could potentially trigger a recession in Italy.

Soaring gas prices drive inflation

Like other members of the eurozone economy, Italy has been battling eye-watering inflation boosted by soaring natural gas prices. Europe’s second-largest natural gas importer after Germany imported most of its natural gas from Russia in 2021, before the war in Ukraine.

Natural gas prices in Europe have repeatedly hit record highs this year as Russia has been cutting deliveries to the continent to retaliate against sanctions over its invasion of Ukraine.

Natural Gas EU TTF Price (2017-2022)

Inflation in Italy grew at an annual rate of 11.9% in October 2022, accelerating from 4.8% in January due to high energy prices. The pace of energy prices rose by 73.2% in October, compared to 44.5% in September.


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Italy’s inflation based on Harmonised Indices of Consumer Prices (HICP) was estimated at 12.8% in October, compared to 3.2% in October 2021, according to data from European Union’s statistics office, Eurostat.

HICP is used by the European Central Bank (ECB) to measure inflation in the euro area. Therefore, as a member of the Eurozone, Italy’s inflation target follows the ECB's inflation target of 2%.

Rising interest rates bite consumer spending

In October 2022, the ECB hiked its policy rate by 75 basis points to combat inflation in the Eurozone area. The ECB has hiked the policy rate three times since the central bank began its tightening cycle in July, lifrting the rate by a total of 200bps.

Rising prices and high interest rates have started to bite consumer spending. A survey by consulting firm McKinsey & Company from 23 September to 2 October 2022 showed that Italian consumers were shifting to discounters and private labels, as well as refraining from splurging to cope with price increases.

The firm’s report said:

“The leading factors in choices of brands and retailers are lower prices and value for money. Even for holiday shopping, most consumers are planning to spend less this year.”

Consumer spending, which refers to the consumption of final goods and services by households or individuals, is critical to economic growth. Slowing consumer spending could harm business performance, causing them to reduce production, cut wages, or lay off workers, affecting the overall economy.

Political instability

Decades of political instability have curbed the country’s economic growth as the government changes frequently. Newly elected Prime Minister Georgia Meloni is leading the country’s 68th administration since the end of World War II, according to Euronews.

Short-lived administrations can make it difficult to implement policies.

On 26 October, Meloni won the second of two required confidence votes from Italy’s parliament which strengthened her administration.

ING’s Pizzoli weighed in on the economic consequences of Meloni's election:

“All in all, we remain convinced that in the short run PM Meloni will have very limited room to manoeuvre on the economic front, with priorities mainly set by external constraints (energy inflation) and by the need to implement the Recovery and Resilience facility measures to contrast the incoming recession.”

Italy economy forecast: 2023 outlook and beyond

The European Commission's Italy economy forecast saw the economy enter a period of contraction, with no visible recovery until the second half of 2023 as the negative impact of high energy prices is set to take the upper hand.

The commission’s projection expected Italy’s recession in 2023, with the economy to slow to 0.3% in 2023, down from 3.8% in 2022, and then rebound to 1.1% in 2024.

Oxford Economics’ overview of Italy’s recession for 2022, published on 10 November, saw a deep contraction in the country’s economy over the winter of the current year, with negative growth until 2023.

“Higher inflation and weak investment will weigh harder on demand while manufacturing – and exports – will be hindered by high input costs and gas scarcity. The gloomy picture is corroborated by the broad deterioration of some indicators that are useful to predict recessions, based on historical experience,” according to the firm.

As of 7 November, ING Group projected Italy’s GDP growth to slow to 1.1% in the final quarter of 2022 and 0.6% in the first quarter of 2023. According to the bank, the Italian economy would register negative growth in the second and the third quarter of 2023 before returning to positive growth in Q4 2023.

Overall, the bank expected Italy’s economy to grow by 3.6% in 2022, slowing to 0.2% in 2023. The economy was expected to pick up the pace to 1.6% in 2024 and 1.7% in 2025.

In a note on 31 October, ING’s Pizzoli wrote:

“Confidence data headed further south in October, including in the tourism sector. Households are gloomier as disposable incomes are increasingly eroded by accelerating inflation and with a backdrop of slowly growing wages. The new government will likely prioritize a new wave of compensatory measures, but these will mostly refinance expiring ones and so limit damage rather than inducing a turnaround.”

Rabobank expected the Italian economy to grow by 3.3% in 2022 and contract by -0.6% in 2023.

“The main risk to our outlook is a complete stop in Russian gas flows. High energy prices for longer are already part of our baseline projections, but shortages are not. Despite the measures Italy has already taken, it would probably still face gas shortages this winter if Russia were to stop sending gas entirely, pushing growth further into contractionary territory,” wrote Maartje Wijffelaars, Rabobank Research’s senior economist for the eurozone, on 4 August.

The bottom line

Analysts mentioned in this article projected Italy’s recession to start over the winter. The recession in Italy was expected to be short-lived which may last at least until Q1 2023.

Please remember that analysts' forecasts can be incorrect. You should not rely on them in place of your own research. Always conduct your own due diligence before trading or investing. Never trade money that you cannot afford to lose.


Italy in a recession now?

As of Q3 2022, Italy’s economy still showed positive growth, although analysts expected it would turn into a recession in the winter.

Remember that analyst forecasts can often be inaccurate or wrong. Always do your own research before trading or investing

When was the last recession in Italy?

Italy's last recession began in late 2019 and lasted up until the end of 2020 due to the adverse impact of Covid-19 restrictions.

How often do recessions occur?

Data from MacroTrends showed Italy recorded a drop in its economy for more than two consecutive quarters at least seven times between 1962 to 2021.

There were 122 completed recessions in 21 advanced economies over the 1960–2007 period, according to the IMF.

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