Italy: downside risks to growth increase, but there is room for fiscal stimulus

The number of COVID-19 cases is increasing but remains concentrated in some parts of Northern Italy. The government has decided further containment measures: schools have been closed nationwide and attendance to public events has been restricted.

Highlights:

  • The number of COVID-19 cases is increasing but remains concentrated in some parts of Northern Italy. The government has decided further containment measures: schools have been closed nationwide and attendance to public events has been restricted.
  • The government has already set up a €7.6 bn package, with emergency measures for healthcare and the sectors affected so far. More will follow as the European Commission will not object against a much higher deficit than the 2.2% of GDP planned for this year.
  • We project a 0.4% GDP contraction this year, assuming that activity recovers from Q3. Risks are titled to the downside and increasing.
  • The large fiscal stimulus that will be required is made somehow easier by good fiscal results posted in 2019. The primary surplus has increased beyond expectations and a large part of the improvement is structural.

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ITALY: DOWNSIDE RISKS TO GROWTH INCREASE, BUT THERE IS ROOM FOR FISCAL STIMULUS

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