Beyond the GDP that slows down, the maxi recession. Without product aid we will remain isolated

There is no doubt that in the absence of more robust emergency economic measures, which go well beyond the 3.6 billion euro package currently being introduced for the red zone, Italy will suffer a recession which, in the best of all, it will see a contraction in GDP of 0.5% during the first six months of 2020. Probably more. The critical factor will be the speed with which the government will introduce these new measures, which could cost at least two or three times the funds already foreseen.

“It is very difficult to make predictions because nobody knows when the peak of infections will be reached in Italy,” comments Gregorio De Felice, chief economist of Banca Intesa Sanpaolo. If the peak does not arrive in the next ten, fifteen days, even later than the end of March, the recession – underlines De Felice, and with him other economists – would be much more serious.

Almost all the major financial institutions in the world, in their calculations assume that for Italy, for the other European economies and for the United States the peak will occur during the first quarter of 2020. At the moment, however, there is no certainty, and these assumptions may prove too optimistic.

Already on this basis, economists OECD, IMF and World Bank are seeing a drop in global economic growth from 2.9 to 2.5 percent this year. If the epidemic does not reach its peak, and then gradually slows down, by the month of March, we may face a global recession that is moreit is serious.

But what are the main, urgent measures necessary to mitigate the negative economic impact in Italy? De Felice and most industrialists agree that these should include interventions aimed at countering the drop in orders and the interruption of supply chains that are hindering many companies – unable to access components for production – and to alleviate the very serious difficulties that the Italian tourism sector is facing, which is worth over 13% of the national GDP.

These measures should also include a suspension of tax deadlines not only for the red zone and the three most affected regions (Lombardy, Veneto and Emilia-Romagna), but for the whole national territory. Secondly, to avoid a sharp rise in unemployment, the layoff should be extended to the many small travel agencies, restaurants, hotels and other small businesses that make up the tourism sector. Furthermore, temporary forms of financial support would also be needed for companies in other sectors, including exports, affected by a drop in orders, and consequently by a worsening of the cash flow.

Export markets
But a national package of measures would prove insufficient if the contagion were to continue to spread, and the peak in major export markets – such as France, Germany and the United States – were to be reached later than March. In that case, tax incentives and emergency financial aid would also be necessary in other European countries and in the United States and, obviously, at European level. The beautiful words of Brussels, intending to do “whatever it takes” will soon have to materialize in hard cash. And the ECB, which will meet next week, will have to further cut interest rates and / or invent something innovative to guarantee support for the financial system.

The best scenario foresees that what just described will happen quickly, and that for once Europe will appear truly united, as befits a continent faced with an emergency that could turn into the worst crisis since 2008.

In the worst case scenario, however, the amount of money used may be insufficient or arrive too late, while the slowdown in the American economy may prove more substantial. Goldman Sachs and others are severely cutting their estimates for the United States in 2020, from an expected growth rate of 2% to just over 1%. Some even predict a few quarters of zero growth.

In this nightmare scenario, the disruption of the global supply chain would not only push Italy into a more dangerous recession, but could even inaugurate a period in which a shrinking economy would be accompanied by a price increase based on the scarcity of goods. Although unlikely, this scenario involves interruptions in the supply chain that would make it even more difficult than it is already for Italian manufacturers to obtain components, and for retailers to stock up on shelves. With nothing to sell, companies would be forced to lay off workers, triggering a vicious cycle of job losses and reduced consumer spending. Meanwhile, the scarcity of goods would increase prices, pushing Italy into “stagflation”, defined by economists as a stagnant economy combined with an increase in inflation.

The danger of “stagflation”
But the fact that energy prices are currently falling, not increasing, and that current weak domestic demand in Italy is keeping inflation rates particularly low, make this doomsday scenario rather unlikely at the moment.

I asked Jean-Claude Trichet, former ECB president, how he sees the Italian economy right now. His response was, as usual, succinct: “First of all, we are in a very serious and uncertain situation globally: we are all in the same boat,” he commented. “Second, as surprising as it may be, taking into account data relating to infected people and deaths, the latest indicators show that the US economy was more weakened by the epidemic in February than the economy in the euro area. . And finally, I agree that the immediate effect could be both depressive and inflationary for Italy, but fortunately it is not at all said that this situation will continue over time “.

In the end, the bad news is that Italy risks economic disaster. But I am convinced that it will be able to avoid the worst if its ruling class – from politics to industry – manages to remain lucid, roll up its sleeves and team up, and act quickly to allocate the necessary financial help. The solutions exist. Now is the time to act.