Italy: Potential growth is negative – Natixis

Analysts at Natixis, point out that Italy’s potential growth is negative. They calculate potential growth as the sum of the trend in productivity gains and labour force growth and found out it ranges around zero, and that it became negative in 2018.

Key Quotes:  

“The fact that Italy was in recession in the second half of 2018 should not surprise us: Italy’s potential growth is negative (no productivity gains, population ageing). The low level of investment and spending on innovation explains the absence of productivity gains in Italy.”

“The problem is that negative potential growth in a euro-zone country is self-sustaining: Fiscal policy must be restrictive because the fiscal deficit which stabilises the public debt ratio is small; The euro zone’s interest rates are too high for a country which has  negative growth.”

“Negative potential growth, as in Italy, is a dangerous trap: recession becomes a normal situation, and negative potential growth is self-sustaining because it implies a restrictive fiscal policy and high interest rates relative to long-term growth.”