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Giorgia Meloni was exulting just last week that IMF forecasts showed Italy growing faster than Germany and France this year — proof, she said, of the “effectiveness” of her rightwing coalition government’s economic policies. 

But Italy’s prime minister received a rude shock on Monday, after data showed the country’s post-coronavirus pandemic economic rebound lost far more steam than was expected.

Italy’s economy shrank by 0.3 per cent in the second quarter of 2023, far worse than the zero growth forecast by most analysts. The eurozone as a whole, meanwhile, registered a 0.3 per cent expansion.

The grim reading highlights the challenges confronting Meloni’s government, which has been waging a dramatic campaign on high consumer prices, as it strives to keep growth on track and put Italy’s heavy debts on a more sustainable footing.

“This is a nasty surprise for Meloni,” said Francesco Galietti, founder of Rome-based political risk consultancy Policy Sonar. “She was focusing so much on inflation she probably did not expect growth to lose steam so quickly.”

Column chart of GDP growth (% change on previous quarter) showing Italy's recovery stuttered in the second quarter

Meloni’s coalition government is already facing a growing political backlash as it starts to phase out the controversial “citizen’s income” poverty relief scheme that the populist Five Star Movement launched in 2019. 

Rome has decided to impose stricter eligibility criteria amid employers’ complaints that the programme, which last year benefited an estimated 1.7mn households, discouraged Italians from taking up jobs, and created artificial labour shortages.

In recent days, about 160,000 people whom the government considers able-bodied and potentially employable received text messages that their benefits were being cut, leading to protests in Naples and elsewhere.

Opposition parties say the growth figure raises serious questions about Italy’s economic direction.

“This is not about economic downturns or bad luck, these are the results of the blatant inability of this government to manage economic processes and encourage investment,” Ubaldo Pagano, a lawmaker from the opposition Democratic party, said in a statement. 

Italy’s finance ministry blamed the contraction on global factors beyond Rome’s control, including the European Central Bank’s repeated interest rate rises — which have been fiercely criticised by various members of Meloni’s government.

“The results were influenced in particular by the decline in the international industrial cycle, the rise in interest rates and the impact of the prolonged phase of rising prices of the purchasing power of households,” the ministry said in its statement.

Filippo Taddei, senior European economist at Goldman Sachs, said Italy’s disappointing growth figures are part of a broader malaise affecting European manufacturing, including in Germany — which has seen growth stagnate in recent quarters — and Austria, as the export-oriented industry wrestles with weak global demand.

“[The Italian figure] was a downside surprise and below our expectations but the data are clearly saying that manufacturing is facing extended weakness,” Taddei said.

It also reflects conditions specific to Italy, particularly the Meloni government’s decision to put the brakes on its controversial “Superbonus” scheme.

The programme, which had offered Italians a 110 per cent tax credit to undertake energy efficiency-enhancing home improvements, fuelled a frenzied post-pandemic construction boom as people undertook costly home improvements at public expense.

Rome announced big changes to the scheme in February. Italian construction activity in May was down 3.8 per cent from first-quarter levels.

“It was fiscally prudent for the Meloni government to curb the Superbonus last February,” Taddei said. “The transition is not easy but it was well received by market participants and understandably so.”

Angelica Donati, president of the youth wing of Italy’s national builders’ association, said that Superbonus had revved up GDP growth and “it was impossible for the fact that it was essentially stopped cold in its tracks not to have a negative repercussion on the economy”.

At the same time, investments funded by Italy’s €191.5bn EU-funded Covid recovery scheme has progressed far more slowly than expected. “It was the perfect storm,” Donati said.

Analysts still expect Italy’s economy to regain momentum, enabling the country to reach the finance ministry’s 1 per cent GDP growth target for 2023.

While construction may remain weak due to the impact of the Superbonus phaseout, Taddei said manufacturers’ performance would “pick up”.

However, there were no signs of improvement in the fortunes of Italian manufacturers at the start of the third quarter. S&P Global’s monthly survey of purchasing managers found “output and new orders both fell at historically steep rates” in July, and estimated production had fallen the most since the pandemic hit more than three years ago.

“Slowing global demand, restrictive credit conditions and the impact of tightening monetary policy will continue to play a role in such [manufacturing sector] weakness,” said economist Loredana Maria Federico, of Italian bank UniCredit, though she was confident tourism would help growth rebound.

Lorenzo Codogno, a former senior Italian treasury official, said he expected households to spend more as inflation falls. As the Next Generation EU programme moves forward, that would support growth too.

“The economy is clearly weakening because of the tightening of monetary conditions by the ECB but not to the point to justify a recession,” he said. “There is so much stimulus in the pipeline.”

Additional reporting by Martin Arnold in Frankfurt and Giuliana Ricozzi in Rome

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