Italy: Europe’s unlikely outperformer

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Tired of depressing news of economic recession and sluggish growth? Italy to the rescue. Bel paese has emerged as the stronger performer among large European economies over the past four years.

This week Italy’s statistics office revised up its backward output figures to show that in the final three months of 2023, the economy was 4.2 per cent from the level in Q4 2019, before the pandemic.

This is the best recovery of any major European economy and it is about double the pace registered in France and the UK over the same period. It is also much stronger than the no-growth registered in Germany.  

Before you double-check that we’re talking about Italy — the long-term stagnant economy — it’s worth keeping in mind that the unusually strong performance is largely explained by the “super bonus”, the generous tax relief on home improvements introduced in 2020.

It’s difficult to grasp the enormousness of this measure. Italy’s investment, which includes housing, is up 30 per cent compared with Q4 2019, before the pandemic, the fastest rate ever recorded in the country since comparable data began in 2000.

This compares with investment growth of only 4 per cent for France and 7 per cent for the UK over the same period, while Germany registered a 5 per cent investment contraction.

Italy’s better economic performance than some of its peers is “due to the strong tax incentives in construction,” confirmed Nicola Nobile, economist at Oxford Economics. Tax incentives “helped construction activity much more than in other countries, for instance, the 0.2 per cent quarter-on-quarter GDP growth posted in Q4 last year [was] entirely driven by construction,” said Nobile.

Construction output in December 2023 was down 13 per cent in Spain, dropped 7 per cent in Germany and was flat in France, according to Eurostat data. In Italy it was up 40 per cent from 4 years before.

But the boom could go into reverse as the measure is withdrawn, economists warn. The incentives initially covered up to 110 per cent of expenses, but the discount was lowered to 90 per cent in 2023 and 70 per cent from January this year. It is also now more difficult to attain than in previous years and the measure is slated to end in 2025.

“A correction in investment is imminent,” said Melanie Debono, economist at the consultancy Pantheon Macroeconomics. She added applications for the “super bonus” soared more than expected at the end of 2023 as builders and households rushed to take advantage of the measure before the changes in January, and have since been declining.

Separate data published last week showed that the measure also cost a fortune. Official data showed that the budget deficit in 2023 was 7.2 per cent of GDP, well above the government’s 5.3 per cent. This is more than double the eurozone average, a worrying figure for a country with a debt equivalent to about 140 per cent of GDP and that pays over €80bn in interest payments every year.

“The impact of this measure on the fiscal deficit was very large for the last few years, as the cost continued to overshoot the official estimate,” said Nobile.

But probably the more disappointing part is that the latest strong performance barely lifted the country from its long-term economic stagnation.

Compared with 2000, Italy’s economy is only 9 per cent larger, a small fraction of the 30 per cent to 40 per cent growth seen in other major economies. While tackling energy efficiency and housing decorum, the measure did little to tackle the country’s long-term challenges, such as poor productivity growth and the oldest population in Europe.

Well, that’s not much for uplifting news after all.