Italy’s economy enters choppy waters – POLITICO

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Italy’s smooth sailing is about to come to an end.

A combination of factors — the “Super Mario” brand of its prime minister, negative interest rates and the chance to spend nearly €200 billion in EU recovery funds — meant that the EU’s third largest economy was heading into strong growth this year after getting clobbered during the pandemic.

Those hopes are now dashed. War, inflation and looming elections mean a perfect storm is brewing, one that threatens to buffet the economy on multiple fronts.

Prime Minister Mario Draghi was upfront with reporters after a summit of EU leaders in Brussels on Friday on shifting expectations.

“In the euro area, mainly due to energy prices and inflation in general, the forecast for the economy is for a slowdown somewhat in all countries,” he said. Italy’s economy is still doing “relatively well,” particularly thanks to a boom in tourism, Draghi said, but he added that it’ll be important to sustain citizens’ purchasing power to maintain “social peace.”

Gas woes

After Italy’s output fell nearly 9 percent during 2020, it rebounded by over 7 percent last year and was poised for above-average growth this year, carried by pent-up demand. But war, squeezed supply chains and energy price spikes changed that outlook drastically, slashing forecasts for 2022 GDP growth to 2.4 percent, according to the Commission, down from the 4.1 percent previously expected.

The economy could contract further if Russia, after reducing gas supply by 40 percent, decides to close the tap altogether. 

Italy still depends on Russia for around a quarter of its gas needs. While this is down from 40 percent last year, Italy remains the second biggest European gas buyer after Germany. So a total halt in supply could trigger shutdowns and layoffs. 

“The number one risk that currently exists in the European and Italian economy, in particular, is the risk that we get the full disruption of supply in natural gas,” said Filippo Taddei, chief economist for Southern Europe at Goldman Sachs. 

Under that scenario, GDP would drop by 2 percentage points in the eurozone on average, with the most gas-reliant countries — Germany and Italy — shrinking further into negative territory, he said.

“Investment drops, consumption drops, and as a consequence you get into a recession,” he added.

That fear is widespread in Italy. Confindustria, the top business lobby, similarly projects that a halt to gas supplies would mean a 2 percentage point hit to GDP in both 2022 and 2023.

That scenario is why the government in Rome is now scrambling to find alternatives, pursuing gas deals with other countries, including Qatar, Angola and Algeria. It’s also maximizing the use of its coal plants to save gas in a bid to ensure energy security in case of a full Russian shut-off. 

The country’s gas storage is just over half full, but if Russia keeps reducing flows, Italy may struggle to reach its objective of 90 percent capacity by November, in time for the winter.

There’s also the inherent risk of worsening energy-price inflation: The more…

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