Italy Succumbs, Falls Into Recession – Now How Long Before Salvini Seizes Power?

Bad news: Italy is in a recession.

Womp, womp.

The Italian economy shrank 0.2% in Q4. That was more than expected, but to be clear, everyone had already penciled in a recession, the first for the country since 2013.

On Wednesday, during a presser in Milan, PM Conte reiterated that the economy likely contracted in the fourth quarter. He blamed an “unfavorable global scenario”, zeroing in on China and, amusingly considering the economic antagonism between the core and the periphery, Germany.

(Bloomberg)

Needless to say, this casts still more doubt on the prospects for Italy’s budget plan in 2019 and even if the recession proves short-lived (itself a debatable prospect if only because the global outlook continues to deteriorate, at least at the margins), it underscores the notion that ongoing tension between Rome and Brussels has the potential to undermine confidence with negative ramifications for the economy.

I haven’t even looked yet, but I’d bet my life that either Salvini or Di Maio has already blamed this on somebody else, and you can expect that kind of deflection to continue should things get worse – nobody ever takes responsibility when populism goes wrong.

That said, Italy’s populists would have a point if they insisted that this is exactly the kind of economic morass that their programs are designed (even if “designed” is too generous given the slapdash character of some populist platforms) to ameliorate.

For whatever this is worth, Conte was on the tape again today and he’s blaming the trade war. “That there is a war of tariffs between U.S. and China impacting exports doesn’t escape even the most naive analysts”, he told reporters in Rome, adding that he fully expects the economy to rebound later this year thanks to all the “measures” the government is implementing. He also said he’s not scared of the prospect that Brussels will demand a budget adjustment.

Given that this was already baked in, markets are generally ignoring it, although the MIB did dip intraday, along with Italian financials.

(Bloomberg)

As far as the internal struggles within Italy’s coalition, the writing has been on the wall here for quite a while. Salvini will eventually end up seizing power. We’ve said that over and over again and indeed, recent reports indicate his advisors are sick and tired of Five Star. League’s popularity among the electorate certainly seems to suggest he (Salvini) would be fine (politically speaking) without Di Maio.

And see, here’s where this gets potentially dangerous. Presumably, Mattarella would have to dissolve parliament in a scenario where League gambles on new elections. Salvini is said to be wary of the whole thing, but one wonders whether he might just decide that he’s going to effectively install himself as Premier by doing something like – oh, I don’t know – calling an abrupt end to the coalition with Five Star, insisting on new elections and then if somebody gets in the way of new polls being called, declaring that the will of the people has been subverted, opening the door to God only knows what.

Call that far-fetched if you like. Time will tell. Complicating this further are the upcoming EU Parliament elections. Salvini has been eyeing those for months as a new litmus test of populism’s appeal across the bloc.

In any event, Italy falling into a recession is just another blow to the European economic narrative at a time when that story was already sounding pretty dour. This bit of incremental news (even if it’s nothing more than the official recognition of what everyone already knew) would appear to further support the case for another round of TLTROs from the ECB.