U.S. Markets

Fiscal/monetary implications as IT GDP at lowest since 1999

LONDON (IFR) - There is a lot of focus on the Q1 GDP reports with falls of 3.8% for Eurozone, 4.7% for Italy, -5.8% for France and -5.2% for Spain...all on a q/q basis. Instead of q/q a better guide to the damage to growth from Covid-19 is GDP in levels and the picture looks very dire for Italy.

The charts below highlight 1) that Italy had already been the weaker of the Eurozone top four economies with real GDP level unable to surpass its Q1 2008 peak; 2) but the sharp fall in Q1 now takes Italian GDP level at its lowest level since the GFC; 3) indeed Italian GDP on a levels basis is at its lowest since Q4 1999.

From a purely mathematical perspective the debt/GDP outlook for Italy looks very dire as the country has been hit hard by Covid-19 will see its deficits/debt levels rise and the lower GDP level remains low. If Covid-19 is a combination of prior shocks multiplied a few times then the recovery is also likely to be even more tepid/uneven.

The data is likely to get worse during Q2 and goes a long way toward highlighting the need for EZ to act to help support its weakest member and hardest hit by Covid-19. What the EU/euro area does with regards to the Recovery Fund is thus important for the growth outlook and when it comes to debt sustainability there needs to be a leaning toward grants/transfers as opposed to loans.

Fitch’s surprise decision to downgrade Italy to just within investment grade and the latest GDP figures might help to shift the political debate but such a shift is not assured. Without a shift the outlook is likely to be for concerns over Italian debt dynamics to worsen and the ECB forced to intervene via APP/PEPP in the name of keeping a lid on fragmentation.

Real GDP in levels rebased to Q1 2008 = 100

Graphic: Eurozone GDP levels IMAGE link: )

Italy real GDP in levels

Graphic: Italy GDP level IMAGE link:

Reporting by Divyang Shah