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Italian economy set to emerge from recession

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What's going on?

The Italian Ministry of Finance released new growth projections that were more positive. It seems that Italy is making its way out of the recession and stagnation that has dogged the country since the financial crisis. Economic growth is expected to help reduce Italy’s debt burden. Firstly it should reduce the rate at which the Italian State is losing money, the so-called budget deficit, to zero by 2018. Secondly it should also help lower the debt amount relative to GDP, from about 1.3x now to about 1.2x in 2017.  

What does this mean?

Greater economic growth is key to Italy managing its large debt burden. GDP serves as the best indicator of a country’s ability to repay debt. Take the analogy of a private person. Working harder and getting a raise will stop the person from getting future credit card bills (the budget deficit) and also appease the bank about size of the loan on the house (the debt to GDP ratio). Many economic analysts are more confident about the growth prospects due to improving external factors. Lower oil prices should boost consumption because people have more money to spend. A lower Euro is particularly positive to an export-driven nation like Italy. Italy has suffered economically over the last two decades due to the combination of structural economic inefficiencies and the inability to devalue its currency to boost exports. The latter was a common way for Italy to boost its economy before the Euro was introduced. The financial crisis pulled the rug under Italy by further exposing these issues. Investment levels have hence fallen by nearly a third since the financial crisis. Anecdotal evidence indicates that investment levels are on the rise due to greater confidence in Italy’s economic future.  

Why should I care?

For Italians, this is positive from an economic perspective. Italy has been dogged by a difficult economic environment since the financial crisis and the prospects of its government not being able to service its debts. Getting out of this negative spiral would be a welcome break. This is also positive for non-Italians because the ailing Italian economy was a key issue in the Eurozone crisis. The sheer size of Italy’s economy makes an exit from the Euro much more disconcerting to the financial community than, for example, Greece exiting the Euro. Investors might see this as an opportunity to invest in Italy if they share the view about Italian growth picking up. One alternative is to buy an index fund that tracks the main Italian stock index, the MIB 40. Another alternative is to be even more specific and pick export-driven companies benefiting from the lower Euro. A third way would be to invest in Italian government debt on the view that the risk of default has fallen.
Originally posted as part of the Finimize daily email.

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