Italy clears stimulus package to prop up economy

The Italian government has approved a new stimulus package worth 32 billion euros ($38.8 billion) to prop up the battered economy, pushing this year’s budget deficit significantly higher than previously planned.

The money will be used to help the hard-pressed national health service, fund grants to businesses forced to close due to virus lockdowns, finance company furlough schemes and provide cover for a postponement of tax payment deadlines.

A cabinet statement laying out the new measures did not specify what the impact would be on the deficit, but a government source told Reuters the package would push up the deficit to 8.8% of gross domestic product (GDP) from the current goal of 7%.

This will mean the fiscal gap falls only slightly this year from the 10.8% pencilled in by the Economy Ministry for 2020.

This year’s target may be revised even higher in April, when the Treasury reviews all its public finance targets to take into account the weakening prospects for economic growth.

The new package means the government has approved almost 200 billion euros in various stimulus measures since the COVID pandemic hit the country last February.

The latest wave of stimulus spending, formalised at a late night cabinet on Thursday, comes in the midst of a government crisis following the decision of former premier Matteo Renzi to his small, centrist Italia Viva party from the ruling coalition.

Despite walking out on the government, Renzi has said his party will help approve the stimulus plan in parliament.

Rome plans to use some 5 billion euros of the extra-spending to extend financing for temporary layoff schemes, while a ban on sackings due to expire in March is likely to be extended until June, a second government source said. The hike in the deficit will push up Rome’s huge public debt, the second highest in the euro zone after that of Greece.

Rome’s debt pile was previously targeted to decline marginally this year to 155.6% of GDP from 158% expected in 2020. The government sources did not indicate what the new target would be.

The British economy looks set to fall back into recession after official figures on Friday showed that it shrank by 2.6% month-on-month in November, when much of the country was in a second coronavirus lockdown.

The Office for National Statistics said that as a result of the fall, the economy is 8.5% smaller than its pre-pandemic peak. When the pandemic struck last spring, the economy contracted by up to a fifth over the first half of the year, before a summer easing of restrictions saw the economy recover a chunk of those losses.

Because of the November fall, the economy is set to contract again in the fourth quarter.

With most of the U.K. in an even tighter lockdown at the start of 2021 following a spike in new cases that has been blamed on a new variant of the virus in London and southeast England, it looks inevitable that the economy will shrink further in the first quarter of the year. That means it will have contracted for two consecutive quarters, the technical definition of a recession.

“It’s clear things will get harder before they get better and today’s figures highlight the scale of the challenge we face,” said Britain’s Treasury chief Rishi Sunak.

The November decline was not as bad as some economists feared, an indication that firms have managed to work out ways of selling their goods even when their doors are closed through online services.

The services sector was hit hard in November, shrinking by 3.4% as rafts of hospitality and leisure firms were forced to shut. The sector is now 9.9% smaller than it was in February 2020, before the impact of the pandemic was first fully felt.

“The economy took a hit from restrictions put in place to contain the pandemic during November, with pubs and hairdressers seeing the biggest impact,” said Darren Morgan, director for economic statistics. “However, many businesses adjusted to the new working conditions during the pandemic.”

The hope is that the rollout of coronavirus vaccines - the UK is ahead of many other countries - will see a pick-up in activity later this year.

“While the economic story today is of only the second-ever double-dip recession on record, the story of the year will be a vaccine-driven bounce back in economic activity for sectors like hospitality and leisure,” said James Smith, research director of the Resolution Foundation.