Italy faces mounting economic damage from coronavirus

In the Italian town of Guanzate, close to the Swiss border, Sergio Tamborini is taking a defiant stance to the healthcare crisis that threatens to engulf his textiles business.

“The easiest thing would be to put the whole world under lockdown,” Mr Tamborini said. “But I decide to fight. It’s time to fight. We are at war.” 

His fabric manufacturing company Ratti Spa works with major luxury brands, producing more than 4m metres of fabric a year. Exports account for approximately 80 per cent of its sales but it is located in Lombardy, the part of the country most affected by Europe’s worst coronavirus outbreak.

The Italian government has imposed the most drastic curbs deployed in Europe so far to contain the spread of the virus, telling Italians to stay at home unless for emergencies or essential work-related purposes. Bars, restaurants, schools, universities, museums, sports centres and all retailers apart from pharmacies and food shops have been closed across the whole country. People have to be kept one metre apart, both in internal and external areas.

The retail and wholesale sector employs nearly 4m people, accounting for about 15 per cent of jobs, and contributes about 12 per cent of gross domestic product.

Even if enforcement appears patchy, the toughest controls on personal movement since the second world war will play havoc with Italy’s already weak economy, compounding supply disruptions — such as those afflicting Mr Tamborini’s textile business — with a demand shock that could drive many smaller businesses to the wall and tip Italy into a painful recession.

UBS, which had been expecting the Italian economy to eke out growth of 0.3 per cent this year, now expects it to contract by 0.4 per cent, or by 0.8 per cent in a “negative scenario”.

The plight of consumers and businesses in the eurozone’s third-largest economy will be at the forefront of policymakers’ minds when the European Central Bank’s governing council meets to consider a crisis response on Thursday. The fear is that the kind of economically-damaging confinement imposed in Italy could soon be required in many other parts of Europe.

“We are talking about bad, very bad or crisis scenarios,” said one eurozone policymaker. “We have moved into the very bad [scenario].”

The Italian government hopes that allowing people to move around for work could save the economy from grinding to a complete halt. But the curbs could prove disastrous for the many small companies in the services sector, and particularly for tourism, which accounts for 6 per cent of GDP. 

About 1.7m people are employed in accommodation and food services, a sector that could suffer a 75 per cent fall in output as a consequence of the nationwide quarantine, according to Capital Economics.

Federalberghi, an association of hotels, points out that many of these workers are on contracts of less than one year and do not qualify for redundancy benefits. The retail sector is also expected to be badly hit.

“It is the services industry that is being completely crushed,” said Brunello Rosa, chief executive of Rosa & Roubini Associates, a consultancy. “Imagine restaurants, cinemas, any sort of personal service. This [consumption] is not postponed but lost.”

Armed Italian Carabinieri police officers hold a road check point at the border between quarantined areas near Bologna. © Piero Cruciatti/AFP/Getty

Andrea Rucci said he had closed Playsound, a music recording business he set up in Milan, until at least April 3. “The situation is really bad,” he said. “I have no money coming in at the moment.” 

Fiat Chrysler has temporarily halted operations at some of its plants in Italy and is adopting measures to minimise the risk of spreading the contagion between employees. Four plants will be shut for two or three days a week.

“To enable greater spacing of employees at their workstations, daily production rates will be lowered to accommodate the adapted manufacturing processes,” the group added in an official statement on Wednesday.

Rome has increased the scale of a planned stimulus package to help cushion the economic blow to at least €25bn, Prime Minister Giuseppe Conte said on Wednesday. It will include funds for topping up wages and support for exporters as well as extra money for the health service.

Ministers are also examining a state guarantee scheme for banks to encourage them to extend forbearance for companies and households that struggle to repay loans. Rome on Tuesday floated the idea of allowing homeowners to delay mortgage payments during the crisis.

“Given the scale of the disruption that all of this will cause, we suspect that the government will eventually provide fiscal support worth several per cent of GDP,” said Jack Allen-Reynolds, senior Europe economist at Capital Economics. 

“This wouldn’t do much to raise aggregate demand while the quarantine is in place, but it would help to maintain spending on essential items, prevent borrowers from defaulting on their loans and provide a grace period for some tax payments.”

Economists now expect an even sharper GDP contraction in the first quarter of 2020 than they were expecting a few weeks ago — which would push Italy into its fourth recession in just over a decade, after output fell 0.3 per cent in the last three months of last year.

Suspected coronavirus patients are checked by medical workers in Brescia, Italy © FILIPPO VENEZIA/EPA-EFE/Shutterstock

“We are estimating a recession of 2 to 3 per cent in the first quarter,” said Mr Rosa. “If that is protracted we are talking about a recession of at least 2 per cent in 2020 and that is assuming the [containment] measures are effective.”

While there would be some direct impact on the rest of the eurozone through disrupted supply chains and weaker demand, the bigger effect will be on business and consumer sentiment, because of “the fear of what may be coming their way”, Mr Rosa added.

Claudio Marenzi, president of Italy’s Confindustria Moda, the federation which represents Italy’s fashion and luxury manufacturing sector, said the question for Italian business was “about the resources every company is ready to deploy”. 

“The larger ones will have relatively fewer problems to absorb the impact [of the outbreak], even if they are the most exposed, [but] the smaller ones will certainly be the ones to fight for survival,” he said. “Every brand and company will stay afloat only if their lungs are big enough.”

Meanwhile, Mr Tamborini is determined to keep investing despite the uncertainty about the future. 

“The only things to do now are keep our factories active as much as we can, continue to invest and wait for the return of a normal workflow,” he said.

Source: Economy - ft.com