February 24, 2020 / 3:51 PM / 3 months ago

Coronavirus set to deal heavy blow to Italy's ailing economy

ROME (Reuters) - Italy’s economy, which was already contracting at the end of last year, looks sure to be thrown into yet another recession by a sudden outbreak of coronavirus that has rocked the country.

A street vendor sells face masks outside the central railway station, after a coronavirus outbreak, in Milan, Italy February 24, 2020. REUTERS/Flavio Lo Scalzo

More than 220 people have come down with the virus in Italy since Friday, latest data showed, the vast majority in the wealthy northern regions of Lombardy and Veneto. Six have died.

Like common influenza, the highly contagious illness is most dangerous for the weak and vulnerable. The same is true for its economic impact, and in terms of gross domestic product growth, Italy is as vulnerable as it gets.

The euro zone’s third-largest economy has been the most sluggish in the 19-nation bloc since the start of monetary union. It shrank by 9% in the wake of the 2008 global financial crisis and has recovered only about half of that since then.

Italian GDP fell by 0.3% in the fourth quarter of last year from the previous three months, yielding full-year growth of just 0.2%. Economists expected it to fare little better this year — and that was before the coronavirus hit.

Lorenzo Codogno, head of London-based LC Macro Advisors and a former chief economist at the Italian Treasury, said he is now forecasting a GDP drop of between 0.5% and 1% in the first quarter, plunging Italy into its fourth recession since 2008.

Looking to slow the worst flare-up of the disease outside Asia, authorities across northern Italy have shut schools, universities and museums, and banned public gatherings including football matches and the famed Venice carnival.

Lombardy, around the financial capital Milan, and Veneto account for around a third of Italian GDP and half its exports.

“The first impact will be on tourism and retailing, with people staying at home and cancelling hotel reservations,” Codogno said. “But even more damaging will be the later impact on companies through disruptions in supply chains.”

Milan’s central Piazza Duomo was far emptier than usual on Monday, and the cashier at the famed cake shop Iginio Massari said clients were down 50% on Sunday and even further on Monday.

Even the city’s cavernous but usually bustling courtrooms were deserted, with the judge immediately postponing a hearing in an accounting scandal involving British Telecom to March 9 due to the coronavirus emergency.

The city council put on hold the Mido eyewear fair that was due to run Feb 29-March 2, while politicians called for a postponement of the April 21-26 Milan Design Week which showcases top furniture-makers and was attended last year by almost 400,000 people.

“The situation is grave because the coronavirus is unlikely to stabilize soon, and the economy was already sinking,” said Roberto Perotti, economics professor at Milan’s Bocconi University. Like Codogno, he forecast the economy would contract both in the first quarter and in 2020 as a whole.

SHARES HIT

The Milan stock market was down 6%, heading for its worst day since 2016. Hardest hit were companies at risk from an expected spending slump such as motorway retailer Autogrill, which shed 12.5%.

Yields jumped on government bonds, increasing the cost of servicing the highest debt in the euro zone after Greece’s, and the cost of insuring Italian debt against default rose.

Italy is the world’s fifth most visited country, according to United Nations data, and tourism contributes about 13% to GDP, according to the World Trade and Tourism Council. The sector is already taking a hit.

“We have been swamped by cancellations in the last few days, in restaurants, hotels, everywhere,” said Patrizio Bertin, the head of the Veneto branch of Italy’s trade lobby Confcommercio.

Marco Michielli, head of Veneto’s hoteliers’ association Federalberghi, said cancellations were “raining down all over the region, like in the rest of Italy,” and criticised the draconian measures adopted by the authorities.

“I think the government has been excessively prudent, to use a euphemism, it’s as though there were an Ebola epidemic.”

The head of Confcommercio for Milan and surrounding towns said the 18:00 closing time imposed on bars, restaurants and entertainment activities would cut turnover by 15% to 20%.

Italy’s fashion industry, boasting brands like Armani, Prada and Moncler, accounts for 5% of GDP and was already struggling due to the coronavirus outbreak in China, its main export market. Things only got worse during the Feb 18-24 Milan Fashion Week.

The key event for the industry was deserted by Chinese buyers and designers, and Giorgio Armani held his show behind closed doors in an empty theatre on Sunday, saying he did not want to expose any guests to the risk of contagion.

Reporting by Gavin Jones; Additional reporting by Silvia Aloisi and Emilio Parodi in Milan, and Riccardo Bastianello in Venice; Editing by Hugh Lawson

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