The Italian economy stalled in the third quarter
The Italian economy has stagnated in Q3, as rising domestic demand failed to offset weaker net exports, raising downside risks to GDP growth forecasts. Per the full note from ing-think, the GDP growth deceleration demonstrates the economy's vulnerability to persistent geopolitical tensions and inflationary pressures. September's flat GDP reading, a significant drop to 0.8% year-on-year from 1% in Q2, challenges the government’s target of 1% growth. As we move forward, expect traders to closely monitor potential shifts in confidence indicators that may emerge as impactful catalysts.
What the desk is arguing
The Italian economy's stagnation in the third quarter signals a troubling trend for future growth. Per the full note from ing-think, the positive contributions from domestic demand were overshadowed by lackluster net exports. This stagnation poses significant downside risks, particularly as the economy's previous resilience appears to be waning against rising inflation and geopolitical tensions.
The GDP growth rate fell to 0.8% year-on-year, marking a notable decrease from 1% in the prior quarter, thus amplifying uncertainty around the government's ambitious growth target of 1%. The stagnation suggests potential weaknesses in private consumption, a critical driver that had supported GDP growth in earlier months. This insight aligns with the desk's perspective that the Italian economy is at a pivotal crossroads, necessitating closer scrutiny of incoming economic data.
Where it sits in our coverage
Our current consensus target for the EUR/USD stands at 1.075, reflecting a range between 1.04 and 1.12. Specific targets from key firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk's perspective aligns closely with jpmorgan, positioned at the upper end of the consensus range, while it diverges from bofa, which anticipates a more bearish outlook.
How other firms see it
Firms like jpmorgan and others hold a relatively aligned view on the overall growth outlook, suggesting moderate confidence in the EUR/USD trajectory amid Italy's economic challenges. Conversely, bofa appears to hold a more pessimistic position, reflecting concerns over ongoing economic stagnation.
Key currency pairs to watch in conjunction with this outlook include EUR/USD, particularly as movements in this pair will be influenced by broader European economic sentiment and likely shifts in monetary policy by the ECB.
What the calendar says
With no significant events on the calendar in the next 30 days, traders should remain attuned to any upward revisions in confidence data which could signal shifts in consumption trends, thereby impacting growth expectations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Italy's GDP stagnated in Q3, raising concerns over growth.
- 02Domestic demand growth was offset by weak net exports.
- 03The flat GDP reading complicates the government’s growth targets.
- 04Upcoming confidence indicators will be crucial to monitor.
Market implications
Traders should look for potential movements in the EUR/USD around levels of 1.075, especially if future confidence data indicates a shift in consumer sentiment. Watching economic indicators closely will provide insights into how the stagnation may influence the euro's positioning.
Risks to this view
An unexpected rebound in export performance or a significant uptick in private consumption could invalidate the negative outlook, potentially pushing GDP growth back toward government targets and strengthening the euro against the dollar.
Older quick take Quick take Published 10:15 Italy The Italian economy stalled in the third quarter A positive contribution from domestic demand was offset by weaker net exports. In an environment still characterised by unresolved geopolitical issues and rising inflation, the flat third-quarter reading adds downside risks to our current 0.9% average growth forecast for 2026 Risks to our 0.9% average GDP growth forecast for 2026 are now tilted to the downside The Italian economy’s resilience to geopolitical tensions and inflationary pressures appears to be reaching its limits, preliminary Istat data suggests. After expanding by 0.2% in the second quarter, GDP stagnated in the third.
On the year, this translates into a growth deceleration to 0.8% from 1% in the second quarter. The GDP reading is weaker than expected, and casts doubts about the attainability of the 1% government target set in the planning budget document recently submitted to the EU Commission. As usual at the preliminary estimate stage, Istat did not disclose the detailed demand breakdown.
It reported that GDP’s flat reading was due to a positive contribution from domestic demand (gross of inventories), which was cancelled out by a drag from net exports. From the supply-side angle, value added expanded in services and agriculture, but contracted in industry. Without knowing the full demand breakdown, we suspect that at the heart of the deceleration in GDP growth might have been private consumption, which had proved surprisingly strong in the second quarter, irrespective of rising inflation.
As far as the role of investment is concerned, we believe that the infrastructural part of the construction aggregate should have remained a growth driver, a tail effect of the implementation of the national recovery plan, which formally expired at the end of June. Looking ahead, data evidence for the fourth quarter is limited to the set of October confidence data released yesterday, which once again depicts a mixed picture, juxtaposing deteriorating consumer confidence with improving business confidence. The deterioration in consumer confidence, driven by a growingly pessimistic take on the state of the economy, is likely to do with the impact of the current inflation wave on disposable income and seems to translate into diminishing intentions to purchase durable goods.
The improvement in confidence in services, on the other hand, might still be compatible with a recomposition in consumption towards services. Stability in manufacturing confidence confirms that the adverse geopolitical environment and its impact on relative prices are delaying a manufacturing recovery for the time being. All in all, so long as price pressures remain in place and monetary policy responds with rate hikes, room for an acceleration in domestic demand remains extremely scarce.
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