The second estimate for Italian GDP growth in Q1 2018 confirmed an expansion of +0.3% q/q. A negative growth contribution from the external sector with exports (-2.1%) falling at a faster pace than imports (-0.9%), was more than made up for by positive impulses from domestic demand. Worryingly though, inventories (+0.7pp) proved to be the main driver while private consump¬tion growth (+0.3%) was moderate and fixed investment activity registered a sizeable set-back (-1.4%). Going forward we expect no pick-up in domestic demand given elevated political uncertainty around the course of Italy’s newly installed populist government. On the contrary, in our baseline scenario we expect concerns about the negative impact of expansive fiscal policy measures on public debt fundamentals as well as a moderately confrontational EU stance to weigh on firms’ investment and hiring plans and on consumption decisions. The external sector is unlikely to save the day with export demand – in particular from the Eurozone – showing signs of slowing down while the threat of intensifying trade tensions persists. We forecast GDP growth to slow to +1.2% in 2018 from +1.5% last year.
