Italy Quake Seen Affecting Economic Confidence as Growth Stalled

  • Premier Renzi already faces stagnant economy, political risks
  • Death toll rises to at least 241 as rescuers keep working

As Prime Minister Matteo Renzi’s cabinet meets on Thursday to pass relief measures for the people hit by this week’s deadly earthquake, the government’s response to the emergency appears to weigh on Italy’s economy and the premier’s own prospects.

While rescuers keep searching for survivors and bodies amid the debris of small mountain towns in the central regions of Lazio, Umbria and Marche, Renzi and his ministers will approve the allocation of resources of about 50 million euros ($56.5 million) from a government relief fund. The way the money is spent will be key.

“The quake does add to Renzi’s challenges and so the political and economic impact of the quake via that indirect channel could yet prove profound and lasting,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

The quake hit amid criticism of Italy’s economic stagnation and rising public debt while Renzi faces a constitutional referendum in the fall that could decide his political future. The longer-term strategy to boost the country’s seismic-risk prevention might involve increased public spending.

Burden, Boost

“It remains to be seen if this will be a burden or rather a boost for Renzi,” said David Schnautz, analyst at Commerzbank AG. “If he manages to be viewed as a leader you can trust in such difficult situations, this may also increase voter support for other political projects."

Still, both the reconstruction and any new plans to reduce risk in a nation where 70 percent of buildings are considered vulnerable to an earthquake may require unprecedented budgetary leeway, forcing Renzi to engage in a difficult negotiation with his European Union counterparts and partners who expect him to make good on commitments to reduce Italy’s deficit and debt.

European institutions will have to decide whether to allow Italy some flexibility on previously agreed targets, said Claus Vistesen, economist at Pantheon Macroeconomics.  “After all, rebuilding is needed now, and the government is obliged to step in.”

The death toll of the quake that struck at 3:36 a.m. Wednesday, destroying and burying victims in the rubble of collapsed buildings, has risen to at least 241, Italy’s Civil Protection agency said in an update earlier on Thursday. The event caused more than $1 billion in economic losses, according to early estimates from hazard-analysis company Kinetic Analysis Corp.

Reinsurers may be affected if insured losses overtake those of the 2009 earthquake that devastated the city of L’Aquila, according to Bloomberg Intelligence.

Most economists agree that it is too early to have a clear assessment of the overall cost of the earthquake. Still, it could be felt on Italian economic confidence, which this year has slipped back from the multi-year highs reached at the end of 2015 and will be a key determinant of GDP growth over coming quarters, Daiwa’s Scicluna said.

Even before the earthquake, the government considered slowing down the pace of its budget adjustment instead of squeezing the economy to reduce the 2017 deficit to 1.8 percent of gross domestic product as agreed to with the EU. Italy needs a deficit-to-GDP ratio of more than 2 percent to allow for an expansionary budget, Deputy Finance Minister Enrico Morando had said in interview with newspaper Corriere della Sera published last week.

“Of the buildings across the country that are unable to withstand the earthquakes, many are schools and hospitals housed in old constructions, for which seismic retrofit is impossible,” said Alessandro Martelli, former head of research at the Italian National Agency for New Technologies, Energy and Sustainable Economic Development. “The government needs to start putting money aside within a multi-year plan, prioritizing the intervention in the most vulnerable areas.”

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