Italian coronavirus cases increase downside risks

  • So far, the knock-on effects from the downturn in China on the euro-zone economy have been negligible. However, the jump in confirmed cases in Italy this weekend adds another channel through which the virus could hurt the economy. It also makes another recession in Italy more likely than not.
  • So far, the economic impact of the virus on the euro-zone economy seems to have been minimal. Indeed, February’s Ifo Business Climate Indicator for Germany and Composite PMI for the euro-zone both rose. Admittedly, this was partly due to an increase in delivery times, which firms attributed to supply chain disruption caused by the virus. And consistent with that, the ‘quantity of purchases’ PMI fell. But most of the monthly changes were pretty small, and the output component of the Manufacturing PMI edged up.
  • However, the jump in infections in Italy this weekend has highlighted the risks from a more literal form of contagion. At the time of writing, there were 219 confirmed cases in Italy and five fatalities. This compares to only 16 cases in Germany, the country with the next most infections. As a result, equity prices in Italy have fallen by about 7% today, with those in other major euro-zone countries dropping by over 4%, as investors worry that those countries are also vulnerable. (See Chart 1.)
  • There will undoubtedly be a hit to Italy’s economy because the authorities have responded forcefully –and it is this response, rather than the illness itself, which reduces economic activity. Ten towns are now in lockdown; schools, universities, museums and theatres in the north of the country have been closed until the end of the month; and major public events such as football matches have been postponed. While this response might help to contain the virus, it will also increase the short-term damage to the economy.
  • What’s more, the affected regions account for a disproportionate share of output. Most of Italy’s cases have been in Lombardia, which accounts for 16% of Italy’s population, 22% of gross value added and an even higher share of manufacturing. (See Chart 2.) The region also accounts for a quarter of arrivals at Italian airports, so there would be a big impact if tourists decide to stay away – and tourism accounts for 7% of Italian GDP. As a result, it now looks likely that Italy will be hit harder than any other European country, probably causing the economy to suffer a second consecutive quarterly contraction.
  • Looking ahead, the risk to the euro-zone now hinges as much on how rapidly the virus spreads at home as on developments overseas. China’s experience suggests that new cases could continue to increase for two weeks after the authorities impose strict travel restrictions. But in Italy’s case, the authorities’ quicker response could succeed in nipping the virus in the bud.
  • We have previously estimated that the virus may knock 0.1% off euro-zone GDP in Q1 and we now think it will knock a bit more than that off Italy’s economy, which will push it into recession. While this would be a significant hit to the economy, we doubt that it would be enough to prompt a policy response from the ECB in the coming months. Policymakers would be increasingly likely to react if the number of cases rises sharply in the coming weeks and/or if many businesses are closed for a significant period of time.

Chart 1: Headline Equity Prices
(% change since 20th February)

Chart 2: Lombardia Share of Value Added
& Air Passenger Arrivals (%)

Sources: Refinitiv, Capital Economics

Sources: Istat, Eurostat, Capital Economics

Jack Allen-Reynolds, Senior Europe Economist, +44 20 7808 4995,

Jack Allen-Reynolds Senior Europe Economist
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