Italy’s Coronavirus Crisis Plunges Broken Economy Into Recession Spiral

• A recession hit Italy in 2018 after the country saw a 0.2% quarterly drop in economic growth.
• It is at risk of a greater recession due to the coronavirus outbreak.
• The local manufacturing sector is en route to see 18th consecutive negative month.

Italy entered a recession in the last quarter of 2018, with a 0.2% drop in the economy. As it started to recover, the coronavirus epidemic hit the nation, leading finance ministers in Europe to warn a plunge in the markets  in the coming months.

The eurozone has been seeing its rate of growth since 2014, as it ended 2018 with a mere 1.8% growth . The coronavirus outbreak adds significant pressure to an already struggling economy, leaving a severe market correction as a strong possibility.

Central Banks Keep Responding To Coronavirus With Fiscal Policies, But Until When?

Central banks in Europe, Asia, and the U.S. have been scrambling to introduce strong stimulus packages in an attempt to prevent further decline in the global economy.

On March 1, Italy revealed its plan to put in $3.6 billion into its economy , introducing large tax cuts as a part of the package.

Mario Centeno, the Finance Minister of Portugal, also said that the government is “ready to use all appropriate policy tools” to secure sustainable growth and protect the economy from downside risks. 

The problem with the sudden vamp up of fiscal spending and stimulus packages is that they can create instability for long-term economic growth.

High profile investors like DoubleLine Capital co-founder Jeffrey Gundlach and Bridgewater Associates founder Ray Dalio have warned against the debt crisis  and the overuse of stimuli by central banks throughout the past decade.

In 2011, Gundlach said that a “debt crescendo” is forming in Europe , and that politicians have been covering up the risks with a band-aid as a temporary measure.

He said at the time:

[Politicians might] put a Band Aid on a system which didn’t break a week ago, or a month ago, or a year ago. It’s been in the process for years.

The coronavirus outbreak and its effect on major economies in Europe and Asia have been dire, but the injection of billions of dollars in liquidity and an abrupt increase in fiscal spending puts the global economy vulnerable to a large-scale recession. 

Already, investment firm executives in the likes of Bianco Research president and CEO Jim Bianco  and Canaccord Genuity strategist Tony Dwyer  have begun to warn against the possibility of a recession in the short-term.

Manufacturing in Italy, China, and South Korea have been increasingly slowing down throughout the past six months.

For Italy, which faces more serious economic consequences from the coronavirus outbreak than China, is set to see its 18th consecutive monthly decline in manufacturing activity  after a slow month in February.

Worse May Be Yet To Come

On March 5, the government of Italy confirmed that the country will close down all schools for at least ten days  in an effort to contain the coronavirus outbreak.

Events like Serie A football matches, concerts, and conferences have all been put on hold, as health ministers in Europe remain uncertain whether the peak of coronavirus has been achieved.

A study conducted by researchers at Guangzhou Institute of Respiratory Health  found that the peak of coronavirus in China was achieved in February, and it is expected to slow down approaching April.

For countries other than China that have seen large local epidemics, it is still unclear if the peak is yet to be seen.