Draghi Presided Over Strongest Italy Growth in Four Decades

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Italian Prime Minister Mario Draghi presided over the strongest growth in more than four decades, a feat that may be difficult to repeat as he deals with fallout from his failed attempt to become the country's president.

Last year's 6.5% growth pushed by both industry and the services sector is a bounce back from an almost 9% decline in 2020 caused by repeated lockdowns and other Covid restrictions.

Draghi, who became prime minister in February, embarked on a program of fiscal largesse to protect families from pandemic fallout and try to boost growth. The plan worked though there are signs of slowdown.

Gross domestic product increased just 0.6% in the final three months of the year, according to data from the national statistics institute, much lower than in previous quarters. Overall, output remains lower than it was before the pandemic hit in early 2020.

What Bloomberg Economics Says...
“Looking ahead, we expect aggregate demand to expand by 1.1% in 1Q. Fresh government spending from the stimulus package should increase the level of GDP by 0.6% once again from January to March. However, downside risks for 1Q are created by the omicron variant of Covid-19, high energy prices and supply chain constraints.”
--David Powell, senior euro-area economist. For full react, click here

A jump in energy prices for households, partially cushioned by government aid, may weigh on consumer spending and in turn on economic output. Inflation hit a two-decade high in December and is expected to stay elevated in the first half of the year.

The political situation in Italy doesn't help: After almost a week of failed votes, Italy's deadlocked parliament on Saturday re-elected Sergio Mattarella as president as a last resort to end the impasse. That's a blow for Draghi, who'd initially been seen as a top contender for the job and had hinted he'd be willing to become head of state.

The ordeal exposed his inexperience in dealing with the political cross-currents in Rome. The extent of the damage for Draghi, who was appointed and is backed by a fractious coalition, will become clear in the coming weeks as he seeks to push through his plans for rebooting the economy.

Still, investors welcomed what they see as another year of political stability before the Italy heads into parliamentary elections in 2023. The spread between Italian 10-year government bonds and German bunds tightened on Monday.

Europe is lagging the U.S. and the U.K. in recovering from the pandemic with supply issues harming companies and continuing coronavirus infections and curbs still disrupting the economy. Though France and Spain reported faster than expected fourth-quarter growth, Germany's economy shrank 0.7% in the period.

The Italian Finance Ministry still expects the economy to grow more than 4% this year, it said in a statement Monday. That's more optimistic than the Bank of Italy's 3.8% forecast.