Recession in Europe? Not So Much, Not Even in Italy

Andrew Rosenbaum

Not long ago, the French Finance Minister mouthed off about the “recession in Italy and its threat to Europe“. Italy is technically in a recession, but not by very much. Meanwhile, the European Central Bank (ECB) is sabre-rattling about the threat of recession in the rest of Europe.

But the predictions are not particularly dire: Fitch Ratings, the credit agency, is predicting 1% growth in Europe in the coming year, and domestic economies are still performing well.

Philip Lane, who has been named the next chief economist at the ECB says that the slowdown in Europe will be “limited.” “Europe is not in a super fragile situation,” he adds.

Wealth managers – the people who need to guess correctly about the global economy, because they manage so much money all over the world – just don’t see a major recession coming. “Based on the current prices of assets, I see a real case for optimism,” writes Brad Conger of the $100 million-assets-under-management firm Hirtle Callaghan.

Growth is slow, but certain

There has been endless gloom-and-doom in the press about Europe, and Italy in particular, but it’s just not justified by the facts.

The International Monetary Fund sees global growth at 3.5 per cent in 2019, rising to 3.6 per cent in 2020. The biggest destabilizing factors, according to the IMF, are the current disruptions in international trade, which have slowed investment.

“Europe continues to enjoy respectable growth fuelled by domestic demand, supported by high employment and wage growth,” the IMF says.

Granted, a slowdown is coming, but growth will continue afterwards. “Compared with the previous forecast by the International Monetary Fund, growth has been revised downward in about half of the countries in Europe. The downward revisions reflect weaker external demand and higher energy prices. Nevertheless, growth is expected to remain above potential in most countries in the region,” the IMF concludes.

Certainly, the disruption of international trade and some political concerns have affected Europe sharply – along with the endless issue of Brexit.

But FocusEconomics sees “headwinds to growth as moderating somewhat by year-end. Industrial production is expected to normalise after one-off shocks, while external political uncertainty could also take a step back if the EU and the UK finalise a way forward in March and if the U.S. and China strike a trade agreement. A solid labor market and accommodative monetary policy will continue to drive growth, while consumers should also benefit from contained inflation and lower-than-expected oil prices.”

Economists at S&P chime in with this forecast, as they see growth in Europe as benefiting from a number of factors: “We see domestic demand as the main driver of activity. Consumption will benefit from falling unemployment, rising wages, and lower energy prices. Business investment will benefit from solid credit growth, boosted by loose financial conditions and high capacity utilization. The weakness in the third quarter of this year was temporary in our view (with the German economy contracting, weighed down by a sharp decline in automobile production), and we are forecasting growth of 1.6 percent for 2019, from 1.9 per cent this year.

Italy should recover rapidly

There has undoubtedly been turbulence in the Italian economy that has led to the slight technical recession, but the capacity for and expectation of recovery is clear.

Despite all the conflict in international trade, Italy has retained its competitive position, as its exports are sound, according to economists at ING bank.

“There was a consolidation of employment gains over the summer and growing evidence of tentative wage pressure,” the ING economists say.

What is very encouraging, according to ING, is that Italian exports have performed well despite the poor economic environment. “Net exports provided a marginally positive contribution to quarterly growth, thanks to a decent export performance, which materialised in spite of an already deteriorating international backdrop,” ING writes.

Moreover, ING expects a swift turnaround in 2019. “We do not buy into this story about prolonged recession, as some of the pending uncertainties weighing on 2019 might hide positive surprises,” ING economists write, adding that, certainly, there is a good chance for a reversal of fortunes for the Italian economy in 2019. “The fundamentally more sound demand component looks set to be private consumption, supported by employment, which has stabilised at around pre-crisis highs, and by a likely recovery in real disposable income related to the energy-price-driven drop in headline inflation,” they add.

When will recovery start?

It’s difficult to pinpoint when recovery may be expected to start, as Brexit continues to weigh on Europe’s economic fortunes.

But, factoring in that there will in fact be a solution of some sort to this quandary, the ECB can be expected to support a recovery with low interest rates.

Klaas Knot, Dutch central banker and a prime candidate to replace Mario Draghi as ECB president, said in December that the ECB will probably take steps to support the recovery.

“Talk about a crisis, or a recession, is premature,” Knot says. “Slowing growth makes sense after years of economic expansion. We’ll see a couple of quarters with somewhat slower growth, and that’s mostly due to external trade, but domestic demand is still holding up in Europe,” he said.

S&P economists also expect support from the ECB to trigger a recovery around mid-year. ~The ECB’s monetary stance will remain accommodative, with the reinvestment of maturing assets from its bond-purchase program and keeping open-end supply in liquidity to banks through the full allotment procedure. Liquidity provision might happen at shorter duration,” S&P concludes.