Italy : bumpy flight ahead

I t would be an understatement to say that 2018 was a turbulent year for Italy. While political tensions between the Italian government and the European Commission seem to have eased again since the revision of the budgetary targets in late 2018, what should we expect in 2019? The concerns about Italy were initially mainly political, given the unprecedented creation of a Eurosceptic and populist coalition government followed by the budgetary trial of strength with Brussels . B ut fears about the economic outlook are likely to surface as well in 2019. The latest cyclical data are not encouraging in this respect, and we expect a stagnation in GDP in Q1 2019. Driven by a more positive external environment, Italian growth will then probably gradually pick up again throughout the year and reach 0.4 % , below the 0.9% annual rate in 2018. However, both external and idiosyncratic downside risks remain in our forecast. Beyond the uncertainties surrounding Brexit and the US-Chinese trade war, the Italian banking sector could be under pressure this year. Above all, the political factor will continue to weigh, with a significant risk of early elections in 2019 and renewed tensions with Brussels that could push up BTP yields again.