Post-lockdown Italy: Adjusting to a new normal

• Italy’s GDP shrank sharply in the first quarter by 5.3% compared to its last quarter figures, hit by the coronavirus crisis, after contracting in the final quarter of last year on plummeting domestic demand. According to updated IMF forecasts, due to the outbreak of the COVID-19, GDP is expected to fall by 9.1% in 2020.
• There are several economic activities adversely affected by coronavirus in Italy, which includes hospitality, transportation, travel agencies, trade, telecommunication, manufacturing, and fashion.
• India is expected to at least double its agri exports to Italy in 2020, especially due to decreased competition.
• The Manufacturing Purchasing Managers’ Index (PMI) surged from April’s record-low of 31.1 to 45.4 in May amid a partial reopening of the economy. But it remained below the crucial 50-threshold, indicating worsening conditions in the manufacturing sector.

Italy is among the most affected countries with coronavirus outbreak across the globe, as the incidences rose at a significant pace than any other country during March and April. In Italy, the death toll from COVID-19 surpassed 33,500, with about 2.33 million people being affected. GDP shrank sharply in the first quarter by 5.3% compared to its last quarter figures, hit by the coronavirus crisis, after contracting in the final quarter of last year on plummeting domestic demand. The country started easing travel restrictions in the beginning of June 2020, and has suffered 33,600 fatalities and almost 234,000 deaths since the onset of the pandemic (as on June 3). 

According to updated IMF forecasts, due to the outbreak of the COVID-19, GDP is expected to fall by 9.1% in 2020 and pick up to 4.8% in 2021, subject to the trajectory of the post-pandemic global economic recovery. The Italian economy was already struggling to achieve positive GDP growth during the pre-pandemic phase and due to COVID 19, the macroeconomic scenario has worsened. The extension of restrictions hints at an intensification of the downturn in the second quarter as well.

COVID-19 pandemic has a distressing impact on the Italian economy, as industrial output fell by almost 30% in March 2020, which is the latest available figure. As per Eurostat, more than 75% of the industrial production in EU 28, so far is generated by six member states, including Germany, Italy, France, UK, Spain, and Poland with 28%, 16%, 12%, 9%, 8%, and 5%, of total EU respectively. With Italy’s share of 16%, it seems the whole of EU is going to face a major problem in sustaining its manufacturing and industrial activities. There are several economic activities which have been adversely affected by coronavirus in Italy, which includes hospitality and food services, transportation and storage, travel agencies and business support, wholesale and retail trade, information & telecommunication, manufacturing, construction and fashion sector.

Going by the overall county rating, Fitch Ratings downgraded Italy’s credit rating from BBB to BBB minus, just a notch above “junk”, due to debt sustainability risks associated to a projected jump in the public debt stock. The downgrade is expected to put upside pressure on borrowing costs.

If we observe the trade statistics of March 2020, the scenario of Italy seems gloomy. Exports tumbled by 13.5% from a year earlier to US$ 40.3 billion, amid lower shipments of machinery & equipment (-21.2%), basic metals & metal products (-12.1%) and textile, clothing, leather and accessories (-27.3%). Meantime, imports dropped at a faster pace of 18.1% to US$ 33.8 billion amid disruptions caused by the COVID-19 pandemic. Lower imports were recorded primarily for chemicals (-8.2%), transport equipment (-31.7%) and basic metals and metal products (-21.6%).

With EU countries, Italy recorded a trade surplus of US$ 0.85 billion, compared to a US$ 0.135 billion gap a year earlier. Considering the first quarter of 2020, the country’s trade surplus widened by US$ 5 billion in the last one year as domestic demand fell at a higher rate which is reflected by lowered imports. Consumer confidence index for May 2020 reduced by 19.5% compared to March 2020 which is a six-year low figure. This indicates that consumer demand will remain sluggish as of now, especially for highly elastic products like luxury cars.

The pandemic will further wreak havoc on Italy’s already-ailing economy by hitting domestic and external demand while disrupting supply chains. On top of that, health crisis will also lead to a widening of the fiscal deficit and further accumulation of the mountainous stock of public debt, while also deteriorating banks’ balance sheets.

India-Italy Major Trade Basket

Major Indian exports to Italy includes flat rolled iron products, unwrought aluminium, accessories of automobiles, polyacetals, coffee, automobiles, footwears, heterocyclic compounds, synthetic organic colouring etc.

India primarily imports light vessels and fire floats, accessories for tractors, machines and mechanical appliances, transmission shafts, dishwashing machines, pumps for liquids, printing machinery etc from Italy. After looking at the requirements of Italy post pandemic, India can very well fit in to cater the Italian market. The plus point is that major exporters to Italy are countries badly affected by the COVID 19 pandemic.

SECTOR-WISE ANALYSIS

Agriculture

Italy is one of the main agricultural players in the EU, being the biggest European producer of rice, fruits, vegetables and wine. The agricultural sector represents 1.9% of Italian GDP and is heavily reliant on the import of raw materials utilised in agricultural production due to the country’s limited natural resources. Italian imports of raw materials are responsible for more than 80% of the country’s energy. Since the pandemic has affected the whole of EU, it will be a dauting task for Italy to meet the requirements within the EU.

Since India is a net agriculture exporter, mainly for primary agriculture products, it can definitely help Italy by exporting much needed raw materials. As per current trade statistics, India does not feature among the list of top agri exporters to Italy, importing worth of US$ 50 billion. Major imports in this category includes meat, marine, dairy, fruits and vegetables, cereals and animal fats. India possess competitiveness in these mentioned products, thus it can act as a major supplier post-pandemic.

Other major suppliers are currently badly impacted by coronavirus which includes Germany, France, Spain and US. India is expected to at least double its agri exports to Italy in 2020, realizing the opportunity of not facing much of competition.

Industry

Italy is a primary industry-led country, with the secondary sector accounting for 21.4% of GDP and employing 26% of the active population. A majority of Italian industry is comprised of small and medium-sized family businesses, with most Italian industrial companies having less than 50 employees. Italy so far, was the largest global exporter of luxury goods (clothing, cars, etc.).

Other major Italian industries include precision machinery, motor vehicles, chemical products, pharmaceuticals, electrical items, fashion and clothing. Now, there is going to be a major challenge for Italian economy to continue with the exports. Since these are elastic products, there will be a significant reduction in the production and exports of these mentioned products. For instance, the Italian fashion industry consists of approximately 65,000 businesses and 620,000 workers, and relies heavily on exports. Brands have been cancelling orders, putting the entire industry composed mostly of small/medium enterprises at risk of bankruptcy within two months.

Although, the manufacturing Purchasing Managers’ Index (PMI) surged from April’s record-low of 31.1 to 45.4 in May, amid a partial reopening of the economy, the index remained below the crucial 50-threshold, indicating worsening conditions in the manufacturing sector, where it has been for over one year. Just to add caouple of more facts, major trade events such as the Milan Furniture Fair have been cancelled and business trips have been scrapped. Corroborating that, virus-related cancellations are already hitting the country’s tourism industry, which accounts for 14% of GDP.

Services

The service sector constitutes 73.9% of GDP and employs 71% of the country’s workforce. Tourism is one of the fastest growing and most profitable industries in Italy has been mostly hit due to the pandemic. Thus, it is difficult for Italy’s service sector to bounce back immediately.

The Italian government has announced several fiscal packages to industries and small business units, so that, they can start functioning again. Recently US$ 17 billion financial aid has been allocated to support employment and workers.

Products which Italy will rely on and import in the coming time frame are as below:

i. Primary Agri Products
ii. Pharmaceuticals
iii. Medical devices and safety/PPE kit
iv. Garments and Garment Accessories
v. Automobiles and parts
vi. Construction material
vii. Organic Chemicals