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The Coronavirus Outbreak Sets Italy On Track For Another Recession

The coronavirus outbreak has been the talk of the town since 2020 started. Majority of confirmed cases were reported within China, the epicenter of the infection, that is until this week. South Korea and Italy reported surges in their cases.

A Struggling Economy Even Before the Coronavirus

The timing could not be worse for Italy. The euro zone’s third largest economy has been struggling since the 2008 global financial crisis when it shrunk by 9%. Since then, it has only been able to recover half of that figure. In fact, in the last quarter of 2019, the Italian economy contracted by 0.3%. Analysts say that there’s a high probability that we would see negative growth of around 5% for the first quarter of 2020. This would effectively qualify the country as being in a recession, it’s fourth one since 2008.

As of this writing, the number of confirmed cases in Italy is up at 650 and the death toll is at 17. These numbers put the country in third place next to South Korea and China with the fastest growth of coronavirus cases.

In response, authorities have suspended schools and universities, closed museums, banned public gatherings, and cancelled football matches in northern Italy.

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The US has issued a travel advisory for those traveling to the country to exercise increased caution. The warning is a level below “reconsider travel” but as it is, Italy’s tourism industry is already taking a hit. There has been a surge in hotel cancellations and some study-in-Italy academic programs have been suspended. This is a problem for Italy because its tourism industry accounts for around 13% of its GDP.

Italy’s High Public Debt

Unlike other countries like Hong Kong that can afford large stimulus measures, Italy cannot. Aside from stagnant growth, the country has high levels of public debt. It is second only to Greece in the euro zone with its debt amounting to 130% of its GDP. Any fiscal stimulus needs to be approved by the European Union while lower interest rates to support growth will be decided on by the European Central Bank.

Policymakers are now caught at a crossroads. Italian officials have set a 6:00 pm curfew for bars and establishments in Milan in an attempt to keep the virus from spreading. Measures such as this do not contribute to the country’s debt but it will not take long until such disruptions translate into long-term problems to businesses. Meanwhile, the government can opt for less-disruptive policies and risk of spreading the coronavirus even more. The question is, which is less detrimental to Italy and Europe?

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