Major Headaches For Investors Is Being Cause By The Euro Zone’s Third Largest Economy — And It Might Get A Lot Worse

The third largest economy of euro zone remains a major headache even when most of the euro zone seems to be flourishing.

Even though recent data have come in above forecasts, Italy is dubbed by many analysts as the biggest threat to the stability of the euro zone economy.

“Italy’s GDP (gross domestic product) year-on-year percentage change is only half of the euro zone average,” Marco Wagner, senior economist at Commerzbank in Germany told CNBC in an email. “This shall remain so for the time being,” he added.

According to forecasts by the European Commission, the Italian economy is set to rise .1 percent in 2018 and 0.9 percent this year. figures from the EU’s statistical office showed earlier this month that from 1.9 percent in the first quarter, the euro zone grew at a pace of 2.1 percent year-on-year in the second quarter of this year.

However, analysts have been positively surprised by recent Italian data.  While three troubled banks have been rescued, easing concerns over the banking sector, a services sector index reached its highest level in a decade in the first half of the year, youth unemployment fell to about 35 percent, and unemployment has fallen 0.7 percent.

“The recovery is expected to continue, but risks ahead are significant,” the International Monetary Fund (IMF) said at the end of July. The Fund warned that the “downside risks are significant” while revising its forecasts for Italian growth upwards for this year.

There are a number of problems however.

The IMF said these include “political uncertainties, possible set back to the reform process, financial fragilities, and re-evaluation of credit risk during monetary policy normalization.”

The same reasons driving concerns about Italy were cited by Erik Jones, professor of International Political Economy at Johns Hopkins University.

“There’s a giant amount of non-performing loans (NPLs),” he said. “The economic recovery is taking place but at a really slow pace … (And) there’s political risks in the horizon with the upcoming general election,” he added.

“At some point in the future the ECB will raise rates, which question the sustainability of Italy’s debt.”-Erik Jones, Johns Hopkins University

Corresponding to 18 percent of total loans for Italian banks, equivalent one-third of the euro area total for NPLs and to 20 percent of Italy’s GDP, Italy’s NPL levels stood at 356 billion euros at the end of June of last year, according to figures from the IMF. The Fund said that the figures call for additional measures even though they have come down since the height of the crisis.

Banks can divert funds away from more productive parts of the economy and their ability to lend is constrained by high levels of bad loans. And for an indebted country like Italy, this can be a particular problem. According to IMF forecasts, public debt is seen at 131.6 percent in 2018 and at 133 percent of GDP this year. Therefore, when the European Central Bank (ECB) begins to raise interest rates, as markets expect, Italy could become a bigger problem if the country doesn’t take measures to address this high pile of debt.

“At some point in the future the ECB will raise rates, which question the sustainability of Italy’s debt,” Jones from Johns Hopkins said.

(Adapted from CNBC)

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Categories: Economy & Finance, Geopolitics, Sustainability, Uncategorized

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