Economic Bulletin No. 2 - 2020

The pandemic has impacted the global economy

In the early months of 2020, the impact of the COVID-19 pandemic on production and aggregate demand was apparent in all economies; there will be a very sharp reduction in world trade this year. The deterioration in growth prospects has translated into a marked fall in stock market indices and into a sudden increase in volatility and risk aversion. In all the leading economies, the monetary and fiscal authorities have enacted strong expansionary measures to provide income support to households and firms, credit to the economy, and to bolster market liquidity.

Extraordinary monetary measures have been adopted in the euro area

After a more rapid start in Italy, the epidemic spread to all the euro-area countries. In line with the drop in production and aggregate demand, and the fear of permanent consequences for the economy, inflation expectations were markedly lower across all time horizons. The ECB Governing Council took decisive action to ease monetary conditions, adopting a comprehensive package of measures, including more expansionary refinancing operations to support firms' liquidity and a new pandemic emergency asset purchase programme that will counter the widening of yield spreads. It also declared that it stood ready to use all of its instruments and to do everything necessary to support the economy.

In Italy the pandemic has a marked impact in the first quarter...

The spread of the epidemic in Italy from the end of February and the measures adopted to counter it had significant repercussions on economic activity in the first quarter. The available data suggest that industrial production fell by 15 per cent in March and by an average of about 6 per cent in the first quarter. Looking at the first three months of 2020, GDP can today be estimated to have fallen by around 5 percentage points. Some service sectors appear to have contributed significantly to this contraction. Extending the measures to contain the epidemic will likely cause GDP to contract in the second quarter as well, which is expected to be followed by a recovery in the second part of the year. Firms' assessments of foreign orders worsened in March. The spread of the coronavirus has halted international tourism flows, which make up almost one third of Italy's large current account surplus.

... but wage supplementation attenuates the effects on employment

The epidemic is having serious spillover effects on employment in all countries. In March, recourse to the wage supplementation fund is expected to have mitigated the impact of the public health crisis on the number of people in employment. In the second quarter employment could, however, contract further, as a result of the non-renewal of some fixed-term contracts due to expire.

Inflation expectations weaken

The available indicators show a weakening in the inflation expectations of Italian firms, pointing to fears that the spread of coronavirus will lead primarily to a fall in aggregate demand.

Central banks have countered the tensions in the financial markets

In Italy, as in other European countries, share prices have fallen and the BTP-Bund spread has widened significantly, against a backdrop of a sharp rise in risk aversion and a deterioration in liquidity conditions on the markets; tensions eased following the decisions of the ECB Governing Council and our sizeable intervention in the government securities market.

The ECB's operations lower the cost of bank funding

A rapid increase in bank bond yields and CDS premiums has been recorded in the financial markets. However, the new refinancing operations decided by the ECB Governing Council are intended to help lower the cost of funding for banks and to bolster their liquidity. Italy's banks are facing this economic crisis with better capitalization and liquidity conditions and higher asset quality than in the past.

Broad measures have been taken to support the economy

In recent weeks, the Government has adopted a series of expansionary measures to support the healthcare system and the households and firms affected by the emergency by strengthening social safety nets, suspending tax payments, approving a debt moratorium on outstanding bank loans and increasing public guarantees on new loans to firms. Additional measures are expected to be announced in the weeks ahead.

The European institutions draw up significant measures

The European Commission has activated the general escape clause of the Stability and Growth Pact, which permits temporary deviations from the mediumterm budgetary objective or from the adjustment path toward it. Furthermore, the European institutions have significantly broadened the range of instruments available to deal with the impact of the pandemic.

The speed of the recovery will depend on the effectiveness of the economic policies

All the current scenarios regarding developments in Italy's GDP incorporate a markedly negative performance in the first half of the year, followed by an improvement in the second half and a marked recovery in economic activity in 2021; however, analysts' assessments vary significantly. How quickly the economy will recover will depend, apart from the course of the pandemic in Italy and abroad, on developments in world trade and in the financial markets, on the impact on some segments of the service sector, and on the repercussions on consumer confidence and income. The timing and effectiveness of the economic policy measures that are being introduced in Italy and in Europe will be crucial.

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