Focus on Italy: macroeconomic and fixed income scenario

Wednesday 20 May 2020

Investment Talks

Italy's public finances: in the short term, the government is expecting a deficit worth 10.4% of GDP and a debt/GDP ratio at 155.7% in 2020, in line with our expectations. A more adverse growth profile, with a 12% YoY contraction this year, would lead to a 13% deficit-to-GDP ratio and a debt-to-GDP ratio of around 165%. Based on government estimates, if the economy grows by 6.1% in nominal terms with a deficit worth 5.7%, the debt could fall to 152.7% of GDP in 2021. We could then assume nominal growth at 2.4% in 2022, with a return to a primary surplus of around 1.0%, allowing the deficit-to-GDP ratio to fall below 3% and the debt-to-GDP ratio to shrink by an extra percentage point.

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The global background and Italy: if we wanted to characterise the contraction and recovery pattern, we would probably describe it as a ‘long U-shaped’ recovery; in other words, as a gradual normalisation which will take some time before seeing a return to pre-crisis levels. In Italy, the government is estimating an 8% GDP contraction this year, followed by a 4.7% YoY rebound in 2021. In our analysis, we consider two possible reference scenarios for 2020 growth: -8.0% YoY (as per the government scenario) and - 12.0% YoY.