Italy’s economy returns to growth in first quarter

Italy’s economy returned to growth in the first quarter (Q1) of the year, pulling clear of its third recession in a decade, while the unemployment rate receded in March, data showed.

Gross domestic product (GDP) rose a quarterly 0.2 per cent between January and March, and was up 0.1 per cent on an annual basis, national statistics bureau ISTAT reported.

Italian GDP had fallen 0.1 per cent in both the third and fourth quarters of last year, putting the eurozone’s third largest economy into what economists often call a technical recession of two straight quarters of shrinking output.

The swift return to growth, however tepid, was hailed by the coalition government, which is struggling to keep a lid on both the budget deficit and state debt as it seeks to fulfil election campaign pledges to boost welfare spending.

ISTAT also reported on Tuesday a fall in unemployment in March, with the jobless rate dropping to 10.2 per cent from a previous 10.5 per cent and youth unemployment down to 30.2 per cent − its lowest reading since October 2011.

Some 60,000 jobs were created last month, while the overall employment rate climbed to 58.9 per cent in March from 58.6 per cent in February − its highest level since April 2008. “These numbers testify to the solidity and stability of the Italian economy,” Economy Minister Giovanni Tria said.

The first quarter GDP data beat the average forecast in a Reuters survey of analysts of a 0.1 per cent rise quarter-on-quarter and a 0.1 per cent decline year-on-year.

Meanwhile the S&P Global affirmed Italy at BBB, two notches above the line separating investment grade from junk; though the ratings agency did maintain its negative outlook on the eurozone’s third largest economy.

Italian government bonds also rallied after S&P Global maintained the country’s sovereign credit rating, allaying some market concerns on a possible slow descent into junk territory. Italian government’s confrontational stance on public spending and euro membership had sparked worries last year that the country could eventually lose its investment grade rating.

Such a move would push Italy out of multi-billion dollar bond indices and likely push its spread over Germany out to near unsustainable levels.

“Some in the market were calling for a ratings cut, which is why foreign investors have been quite cautious in the run up to the S&P decision,” said Commerzbank rates strategist Christoph Rieger. “But on Friday when the domestic buyers returned there was already quite a bit of a recovery, and we are seeing that extended into today.”

Italy’s 10-year bond yield was down five basis points to 2.53 per cent, while the closely-watched spread over Germany was at 254 bps, its tightest in over a week and well off last week’s two-month high of 269 bps.

Safe haven German Bunds sold off, with the benchmark 10-year bond yield rising two basis points to just above zero per cent. Other better-rated eurozone government bond yields also edged higher on the day.

It also emerged this weekend that Spanish Prime Minister Pedro Sanchez looks set to regain power after his Socialists overcame a historic challenge by right-wing nationalists in elections on Sunday, a result he portrayed as a morale booster for the European Union.

There was little immediate impact on Spain’s bond market, with 10-year bond yields flat at 1.03 per cent, though hovering near a two-week low.

“I think markets are still struggling to understand what the vote means, which is why you are not seeing more of a rally,” said Rieger.

The Socialists and left-wing populists Podemos are set to fall around 11 seats short of a parliamentary majority, and bridging the gap would require Sanchez to also rely on Basque nationalists and other small parties.

Later in the week, inflation numbers for the eurozone, a Federal Reserve meeting in the United States and business surveys in Italy and Spain could all have an impact on markets.

Italy once again lagged its eurozone peers in the GDP data, however, with the EU statistics office Eurostat saying economic growth in the 19-nation currency bloc had risen 0.4 per cent quarter-on-quarter in the first three months of 2019.

ISTAT gave no numerical breakdown of components with its preliminary estimate, but said industry, services and agriculture had all shown an increase in activity, with exports helping revive growth. By contrast weak domestic demand had had a negative impact. “The Italian economy came out of recession at the start of 2019 in better shape than expected.

It is likely that the current quarter may be less dynamic, but the cycle’s minimum seems to be behind us,” said Paolo Mameli with Intesa Sanpaolo. Data released last month showed that the fall in Italy’s fourth quarter GDP was primarily due to a sharp reduction in inventories, while exports, consumer spending and investments all expanded at the end of last year.

Reuters