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The strong euro is just a quarter of the battle for Italy in 2018

The strong euro, a near-term end to the European Central Bank’s quantitative-easing program and an uncertain election outcome are spelling challenges for Italy in 2018, according to research by HSBC on Monday.

On the face of it, Italy’s economy looks healthy, given a stronger growth outlook thanks to buoyant consumer and business confidence, but “it’s unlikely the current growth momentum can be sustained,” wrote Fabio Balboni, European economist at HSBC. “Negative real wage growth should keep a lid on private consumption, while exports could suffer from the strengthening of the euro[…]”

1. Euro strength

For 2018 and 2019, the Italian government recently upped its forecast for annual gross domestic product to 1.5% each year from 1% before. But much of its growth is due to exports, which could be hurt by the strong eurozone currency.

“One reason is Italy’s high exposure to markets outside the eurozone,” said Balboni, as 60% of Italy’s goods are exported outside of he European trade bloc.

“Another is Italy’s relatively high share of low-tech exports—part of the reason why it also suffered a large loss in market share in the past decade—which makes it more exposed to competing on prices, and therefore the euro.”

Italy could be hit more than others by this year’s appreciation in the euro