The spread of the coronavirus in Italy could push the country into a technical recession.
The spread of the coronavirus in Italy could push the country into a technical recession as manufacturing plant shutdowns and a sudden drop in tourism cripple chances of a rebound.
A technical recession is defined as gross domestic product falling during two consecutive quarters. Italy’s economy contracted by 0.3% in the final quarter of 2019 and the risks of a second contraction are rising.
In the main affected regions of Lombardy and Venetia, many tourist attractions have been temporarily closed, sports events were cancelled, while companies said they were partially or completely closing production plants.
Shutdowns such as this mean there are risks to Commerzbank’s current forecast for first quarter GDP growth of 0.1%, the bank’s senior economist Marco Wagner said in an interview with Dow Jones.
On Tuesday, the crisis spread to the south of Italy, beyond its original epicenter in the north. On Friday, the death toll from the outbreak rose to 17 and the number of cases jumped to 650 people, officials said.
“There will undoubtedly be a hit to Italy’s economy because the authorities have responded forcefully and it is this response, rather than the illness itself, which reduces economic activity,” said Jack Allen-Reynolds, senior Europe economist at Capital Economics, which expects a second consecutive quarterly contraction in GDP.
The main affected area is an important industrial center in Italy. The four provinces affected in Lombardy alone–Pavia, Lodi, Cremona and Milano–account for around 10% of Italian manufacturing output, said Oxford Economics’ analyst Nicola Nobile.
Coming at a time when Italy’s economy is already stagnating, there is a clear risk that GDP will contract this year, she said. If the measures Italy has taken to contain the virus stay in place for the intended period of one week, the disruption to Italian economic activity would amount to around 0.1% of the first quarter GDP growth.
The regions affected in northern Italy are also contain important tourist centers, including popular cities such as Venice and Milan.
“The value added produced by tourism-related activities amounts to 6% of the total value added in the Italian economy which is definitively a risk for overall economic growth,” Commerzbank’s Mr. Wagner said.
Ostrum Asset Management strategist Axel Botte estimated that economic growth could be cut by 0.25% in the first quarter due to a decline in tourism.
There are risks to demand as confidence among both households and companies takes a hit. On top of that, the global nature of the virus means supply chains could be disrupted.
“The Italian industry is already under pressure due to the manufacturing slowdown in Europe and there is considerable risk that it may additionally suffer from supply chain disruptions,” Commerzbank’s Mr. Wagner said.
The hit to Italy is also a concern for the eurozone as a whole.
“The sudden rise in Covid-19 cases in Italy changes the picture for the European economy,” said Gilles Moec, chief economist at AXA Investment Managers, noting that Lombardy, Veneto and Emilia-Romagna account for 40% of Italian GDP and 6% of total eurozone GDP.
A recession isn’t inevitable, however, and not all economists expect this.
Commerzbank’s Mr. Wagner said the “firm measures” taken by the Italian government mean the virus may be contained and a technical recession avoided.
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