Italy could be heading for a deeper recession

Abstract

Subject Italy's economy. Significance According to the forecasting firm Ref Ricerche, Italy’s economy could contract by as much as 3% in the first half of 2020 following the outbreak of COVID-19. The yield spread between Italian and German government bonds has widened considerably, raising fears of another crisis for Italian banks, as many of them hold substantial amounts of government bonds. Moreover, even when the COVID-19 crisis starts to abate, demand could take a while to pick up, while it will also be difficult to encourage concerned investors to buy Italian bonds. Impacts Italy is likely to need several fiscal packages to deal with COVID-19; this would increase borrowing costs and worry investors. Absent a speedy recovery, Italy will probably need bailout funding from the euro-area and potentially the IMF. A lack of EU solidarity with Italy, which has already been evident, will play into the hands of Matteo Salvini’s League party.