Italy is causing serious concerns for the Eurozone following the intention to implement public spending of up to €20bn.
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This situation is not to be taken lightly if we look at some of Italy’s current economic data. Let us look at Italy’s Governmental debt. It is already colossal in size. Debt is currently estimated at 131% of the country’s economy, the second highest on the EU, behind only Greece at 180% of GDP. The concern with Italy is much more serious however as it is the third biggest economy in the Eurozone. Italy’s economy is roughly 10 times the size of Greece’s. A debt crisis could cause serious problems within the Eurozone economy.
Italy's growth is also very poor, in fact almost non-existent. According to the International Monetary Fund (IMF) there has been less than 0.2% annual growth since 2010. This is crucial, as if countries are growing quickly, borrowers can repay their loans in an easier fashion, because their incomes are also going rapidly. Although other countries experience economic slowdowns, Italy is an extreme case. The fact that Italy’s growth is so negligible means it is highly vulnerable to anything that raises it’s debt or reduces growth.
Italy's new Government made up of the Five Star party and the League Party plans to expand it’s budget deficit from 0.8% of GDP to 2.4% of GDP. This amount of debt is very concerning to Brussels and investors alike. If it were not for the lack of clarity surrounding Brexit I feel the pound would be faring well against the euro.
If you are a euro seller it may be wise to take advantage of current levels considering the possibility of a Brexit deal, and the problems that could occur later down the road as a result of the situation in Italy.
There is little data of consequence for the remainder of the week, the next data releases of importance will be next week’s Purchase Manager Index (PMI) data for the Manufacturing and Services sectors. PMI gives an idea as to the health of business in these sectors. A reading above 50 indicates growth, anything below, retraction.
There is expected to be an increase in manufacturing data from 53.2 to 54.4 which could cause euro strength if figures land close to expectation. I expect little movement in the services sector, but due to services making up a substantial proportion of GDP, keep an eye on the release.
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