Business Cycle Synchronization or Business Cycle Transmission? The Effect of the German Slowdown on the Italian Economy

This work analyses the effects of the slowdown that has hit Germany since 2018 on the Italian economy using data from Banca d’Italia’s Survey of Inflation and Growth Expectations. First, we briefly argue that these two economies are highly interconnected and describe the slowdown that has hampered the German economy. Using a difference-in-differences strategy, we show that since 2018, when the German economy weakened, Italian companies’ sentiment and assessment whose sales were oriented towards the German market was comparatively worse than that of other companies. This finding suggests that there is a transmission link between these two economies. Finally, using a forecasting model, we provide a quantification of these effects that finds that it would have been contemporaneous and relevant for GDP, lagging for the total investment. In contrast, we do not find any significant employment effect