Negative construction outlook in Italy as Covid-19 crisis worsens

13 May 2020 (Last Updated May 13th, 2020 09:44)

Negative construction outlook in Italy as Covid-19 crisis worsens

Italy has thus far been one of the most affected countries in the world by the Covid-19 outbreak, reporting over 219,000 cases and 30,000 deaths since the start of the outbreak. Italy was the first country in Europe to impose lockdown measures in early March. However, with the number of new infected cases and deaths falling in the past few weeks, the government has announced the relaxation of some of these restrictions.

The Italian Prime Minister Giuseppe Conte laid out the timeline for lifting the lockdown restrictions, with most shops being allowed to reopen this week, while bars, restaurants and hairdressers will be allowed to reopen from the first of June. With the rate of new infections dropping faster in some regions, the Italian Government has allowed regional authorities to lift lockdown measures in line with the health situation of their respective states.

Sovereign debt crisis risk

The strict lockdown measures imposed by the Italian Government have had negative economic and fiscal consequences. Italy is currently one of the most indebted countries in the Eurozone with a gross debt of 135% of GDP. The sharp fall in economic activity due to the lockdown coupled with the large stimulus packages announced by the government has dramatically worsened Italy’s fiscal position. According to the Italian Finance Ministry, the budget deficit is expected to rise from 1.6% in 2019 to 10.4% of GDP in 2020, while the debt to GDP ratio is forecasted to increase to 155% in 2020.

The worsening fiscal and economic outlook was followed by the credit rating agency Fitch downgrading Italy’s credit to BBB minus, one grade above junk status, at the end of April. There have been growing concerns by investors that the country may not be able to meet its credit obligations with the growing possibility of a sovereign debt crisis.

With a further downgrade to junk status increasingly likely, if the fiscal situation worsens, an increase in bond yields is likely to continue and the European Central Bank’s (ECB) stimulus measures may not be sufficient to ward off a sovereign debt crisis. While the ECB’s monetary policy has eased credit constraints for Italy in the short run, the country will require some form of financial support from other Eurozone member states, either in form of debt mutualisation or fiscal transfers.

Construction outlook turns negative

The emergency lockdown measures imposed by the government in early March coupled with the worsening outlook for the Italian economy has created a major downside risk for the construction sector. In the short-to-medium term, the commercial construction sector in Italy will be the worst affected with tourism likely to collapse this summer as a result of the global pandemic. Projects in this sector are likely to be put on hold and suspended due to the lack of financing. This will be a large blow to the Italian economy with tourism accounting for an estimated 13% of GDP.

The aftermath of the pandemic will likely lead to fiscal austerity in Italy to stabilise the deficit at a sustainable level, reducing the potential for spending on large-scale infrastructure construction projects. It is likely that the long-term casualty of the crisis will be the infrastructure construction sector, which will see a sharp fall in the number of projects.

GlobalData forecasts that output in the construction sector in Italy will contract by 7.4% in 2020. This is down from the previous projection of 2% growth prior to the virus outbreak in Italy. The forecast is based on the assumption that the outbreak will be contained by the end of the second quarter. However, with the risk of the outbreak spreading more extensively or a second wave occurring later in the year, further downward revisions of the forecasts are likely.