Chart of the Week: Fiscal Uncertainty Weighing on Italian Sentiment

Since the turn of the year, and more broadly over the full timescale of our indicator, Italy’s ESI has been considerably more volatile than that of other euro area countries. After peaking at 1.3% in January, the indicator has now more than halved to 0.6%.  It fell 0.3 percentage points in August alone, as uncertainty over the composition of the upcoming budget continued to unnerve investors and undermine economic sentiment.

Among euro area countries, Italy’s government debt is second only to that of Greece, hovering around 130% of GDP. The country can ill afford to add to this burden. Nevertheless, it is looking increasingly likely that Italy is set to buck the trend across the euro area and loosen fiscal policy. As a result, the economy could well receive a short-term boost. We forecast GDP growth in Italy to come in at 1.1% this year, moderating slightly to 0.9% next year.

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