There’s more bad news for Italy.
A day after Italian equities (and especially banks) staged a rousing relief rally in response to S&P’s decision to hold off on a downgrade, yields are higher and stocks are lower after Istat said economic growth flatlined in the third quarter.
The preliminary read on Q3 GDP showed growth unchanged QoQ, and up 0.8% YoY. That was a disappointment – economists were expecting the economy to expand 0.2% in the period.
Out of 31 estimates, nobody predicted this. Q3 was the first quarter of zero growth since 2014.
“The quarter on quarter change is the result of an increase of value added in agriculture, forestry and fishing and in services and a decrease in industry”, Istat said, adding that on the demand side, “there is a null contribution by both the domestic component and the net export component.”
Italian stocks sank into the red on the news.
“The stalling is part of a wider economic slowdown in Europe and we expected that,” Italian Prime Minister Giuseppe Conte told reporters while in New Delhi.
Predictably, Conte used the poor data as an excuse to “explain” why Italy needs to spend more money. “That is the reason why we decided to do an expansionary budget”, he added, before stating the obvious, which is that “Italy must not enter an economic recession.”
10-year yields rose sharply following the dour data.
Obviously, higher yields and generally tighter financial conditions as a result of market turmoil will not help this situation.
So whatever truth there is to the populists’ assertions that what’s needed to help growth is expansionary fiscal policy, that truth will have to grapple with the reality that the quest to secure Europe’s approval for the budget is likely to dent confidence and sentiment to the detriment of the economy.