Italy: Economy is experiencing a cyclical economic recovery - Rabobank

The Italian economy is experiencing a cyclical economic recovery that masks its structural problems, suggests the research team at Rabobank.

Key Quotes

“Economic policies and reforms that are aimed at raising Italy’s potential growth are imperative. We don’t expect to see many of such reforms, especially when these come with electoral costs. On fiscal policy we only expect a minimum effort to comply with European budgetary rules and not to upset markets too much.” 

“In the short-term markets will nevertheless trade positively if it becomes progressively clear that the Five Star Movement won’t be able to secure a sufficiently large majority to form a populist government with reckless fiscal policies or tough language on “Quitaly” (even as this is not much of an issue lately).” 

“A hung parliament remains however highly likely, despite the changes in the electoral law. But, Italian politics, the Italian economy and – eventually – financial markets are used to, and able to cope with, uncertainty related to a fragmented outcome as long as it produces a government.”

“The biggest risks to Italy’s outlook are therefore that the newly elected parliament is unable to form a government or, even more problematic, that populist forces win enough votes to form a government. While chances of the latter are rather slim, the negative impact of an unexperienced populist government on both markets and the economy would likely be large.”