Italy Looking Less Gloomy With Good News on Growth and Banks

(Bloomberg) -- As Italy moves toward possible early elections, a surprise acceleration in economic growth and a preliminary deal on the rescue of the country's third-biggest bank provided the government with some much-needed good news.

First-quarter expansion was revised up to the fastest in six years, according to a report on Thursday, with a boost from inventories and solid consumer spending. While investment and net trade proved a drag, and Italy is still lagging its European peers, the news lifted hopes for the health of the economy.

“It's surprising and very positive data,” said Paolo Mameli, a senior economist at Intesa SanPaolo in Milan. “The upward revision suggests that 2017 annual GDP growth may exceed 1 percent with similar quarterly performances in the rest of this year.”

At Bloomberg Intelligence, economist Maxime Sbaihi said that while the medium-term outlook remains weak, the upward revision means the economy is “no longer such as sick man.”

The better-than-expected figures came as the European Commission announced that it reached an agreement with Italian officials on a draft plan allowing for Banca Monte dei Paschi di Siena SpA to receive a state recapitalization. Italy's benchmark FTSE MIB index rose as much as 1.3%, outperforming Europe's Stoxx 600 Index.

Italy's main parties are also edging closer to a deal on a new electoral law which paves the way for snap elections as early as the second half of September instead of the scheduled end of the legislature in early 2018.

Thursday's report from Istat showed that gross domestic product rose 0.4 percent in the first quarter, twice as fast as initially estimated and the fastest since the final quarter of 2010.

There may still be a question over whether that performance can be sustained, with recent surveys offering conflicting clues on the outlook. A composite Purchasing Managers Index rose in April, though manufacturing sentiment fell last month as executives grew pessimistic about orders and output. Consumer confidence also declined.

The economy, the euro region's third-biggest, also still has ground to recover before reaching its pre-crisis level.

“At the current rate of growth, GDP would return to its 2007 level in the first half of the 2020s,” Bank of Italy Governor Ignazio Visco said on Wednesday. “Apart from cyclical factors, Italy's economic development is hampered by rigidities in the business environment, the slow growth of productivity, and an insufficient employment rate.”
The GDP report showed that consumer spending increased 0.5 percent in the first quarter. Sales abroad rose 0.7 percent, though strong import growth meant external demand subtracted from GDP in the period.

“The resilience of domestic demand is confirmed as Italy's best asset and may remain so in coming months if supported by a positive trend on the labor market,” said Loredana Federico, an economist at UniCredit Bank AG in Milan. “It remains to be seen whether business investment will match expectations of an improvement after the disappointing performance at the start of the year.”

--With assistance from Giovanni Salzano

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Alessandra Migliaccio, Kevin Costelloe