Italian Q3 GDP contracted for the first time in four years

Italian Q3 GDP growth was revised down from 0% to -0.1%. The economy contracted for the first time since the second quarter of 2014 due to weak domestic demand. Final consumption expenditure and investment spending both declined while external trade contributed positively to growth. We now expect GDP growth to remain flat in Q4 and revised down the 2018 annual figure to 0.9%. This will put additional pressure on the Italian government against a backdrop of negotiations with the European Commission following the recommendation of the latter to open an excessive deficit procedure. The current 2019 draft budget shows an expected 2018 annual growth of 1.2% but the target looks unachievable now. The room to adjust the public finances is becoming narrower and narrower, and the M5S-Lega coalition may have no choice to adjust their key fiscal measures.