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Investment helps Italian economy emerge from pandemic

Matteo Dell’Acqua never thought Italy’s rebound against Covid would be so good.

The 31-year-old boss of a family business says his investment in digitization and more environmentally friendly products made during the pandemic is paying off and has contributed to a 20% annual increase in orders.

“It’s going very well,” said Dell’Acqua, whose company in Lombardy – the initial epicenter of Covid in Italy – manufactures plastic pipes and tubes. The company is “navigating” the post-pandemic phase, he says, thanks to “a positive atmosphere generated by the sudden and unexpected recovery.”

Italy, the first European country to be hit by the pandemic, is now stepping up a gear in its recovery from a widespread vaccination program, robust investments and expanding exports.

“Italy’s economic outlook is much better than we expected in the spring,” Italian Prime Minister Mario Draghi said last month. He expects the country to experience 6% growth this year, in line with the OECD and international private forecasters, and much stronger than the 4.5% expected in April.

Italy’s economic growth has seen the biggest improvement of any other G7 country in the past five months, according to Consensus Economics, which averages forecasts from leading economists.

This is a marked change for a country that has experienced years of economic stagnation, resulting in a lower standard of living than the EU average. Economists hope this could be a springboard for more lasting changes, with the start of an ambitious program of EU-funded reforms and public spending.

“For the first time in many decades, Italy is in such a favorable position,” Laurence Boone, chief economist at the OECD, told the Financial Times. She stressed that Italy was starting to tackle well-known brakes to growth such as a sclerotic civil justice system and public administration and its ineffective competition laws. “Italy is now in a position to reset its economy.”

Draghi, the former president of the European Central Bank, attributed much of the improved outlook this year to his government’s vaccination campaign. The proportion of people fully vaccinated in Italy is the second among G7 countries, after making a Covid ‘green pass’ mandatory for most workers and access to most public places.

Draghi said this allowed businesses to reopen without spikes in hospitalization, boosting consumer confidence and spending. Household consumption rose 5.5 percent in the second quarter.

Nicola Nobile, an economist at Oxford Economics, expects Italy’s economy to grow by around 2.5% in the third quarter, following an above-expected rebound of 2.7% in the previous quarter.

Other factors are also at play in the recovery, said Emma Marcegaglia, chair of the B20 International Business Summit, a G20 business forum.

Investment is “booming”, said Marcegaglia, thanks to government-backed incentives for improving energy efficiency and the purchase of machinery and equipment, as well as increased investor confidence in the Draghi government after years of political instability.

Many companies have also stepped up their digital investments to adapt to the pandemic, helping Italy, which has been lagging behind its EU peers in e-commerce readiness, catch up. Italy’s investment was 5% above pre-pandemic levels in the second quarter, stronger than a marginal contraction in Germany and a 4.5% drop in the UK.

Line graph of real gross fixed capital formation, rebased to Q42019 = 100 showing that Italian investment has rebounded

Exports are also supporting the post-pandemic rebound, with Italy being less affected than some countries by supply chain disruptions thanks to less reliance on semiconductor imports, some analysts say. In the first seven months of the year, the value of Italy’s goods exports increased by 4% compared to the same period in 2019, better than a stagnation for Germany and a contraction for France .

Manufacturers have been nimble to adapt to changing national and international restrictions, said Marcegaglia.

Line graph of annual% change, by forecast date showing that Italy's investment and consumption outlook is improving

The green and digital transition could continue at a much faster pace if Italy obtains the 205 billion euros of the EU’s ‘Next Generation’ stimulus package which has been pledged if reforms and key objectives are met .

This is by far the EU’s biggest commitment to a member state and it would be Italy’s biggest support program since the Marshall Plan after WWII. Italy has already received a payment of 25 billion euros.

The OECD expects Italy’s economic output to return to pre-pandemic levels by early 2022, faster than previous estimates and much faster than recovery from previous recessions , although later than in most advanced economies. Before the pandemic, production had not returned to levels more than a decade earlier.

Line graph of real GDP, rebased to the first quarter of 2018 = 100 showing that Italy is expected to rebound faster than in previous crises

The Italian government is certainly optimistic. He expects the strong growth to continue until at least 2024, reducing the country’s high public debt by more than 150% of gross domestic product and the unemployment rate above the EU average by more. by 9%.

Nobile argues that “ambitious reform programs generally face huge political hurdles in Italy” and that official growth forecasts may be “too optimistic”. Political stability is also a threat to the reforms and the spending plan.

“As good as all this modernization may sound, Italy’s fractured political system has often meant that reforms started by one government are canceled or abandoned by the next,” said Nick Andrews, economist at the investment research firm. Gavekal Research.

Meanwhile, there are shorter-term concerns. Italy is already worried about soaring energy prices in Europe and will spend 4 billion euros to subsidize its bills. A protracted crisis could slow the pace of recovery. Weaker demand following a prolonged supply chain disruption and slowing Chinese economic growth are creating additional headwinds for the country and the global economy.

But the optimism of Italian businesses and consumers remains at its highest level for almost a decade. “Of course, we have to be careful and continue to monitor critical factors such as the cost of raw materials and transportation,” said Dell’Acqua, “but at the moment we are on the rise”.