Uncertainty extremely high ahead of Italian elections, Oxford Economics says

It's unlikely that the upcoming Italian elections will yield a coalition of populist parties, which would unsettle both financial markets and business leaders, but neither are they likely to prove the much-needed cauldron in which an ambitious pro-reform coalition is forged, said analysts at Oxford Economics.

Indeed, according to the consultancy, the most likely result was a 'hung' parliament followed by weeks of talks between the different parties to try and build a working coalition, probably led by the centre-left Democratic Party.

"Ahead of the Italian elections this Sunday, uncertainty remains extremely high. [...] Recent weeks have failed to deliver any clarity on what is going to be one of the most uncertain elections in the Italian history.

"At most, this marriage of convenience (between the rival coalitions of centre right and centre-left parties) will provide some stability, but it is unlikely to help push medium term GDP growth beyond 1% and solve Italy’s productivity woes," the researchers said.

With just days left until the vote, the centre-right alliance led by Silvio Berlusconi's Forza Italia was leading in the polls, with 37% of the vote, with the centre-left Alliance (which included the PD party) polling at about 37%, followed by the 'Five Star' movement at roughy 28%.

Yet that constellation meant the centre-right coalition would probably fall between 20 to 30 seats short of a majority in the lower house of parliament.

Indeed, it was impossible to dismiss a scenario in which no government was formed, forcing the country into new elections towards the end of the year.

That, Oxford Economics said, would spark "a prolonged period of political uncertainty that could weigh on financial markets, with the BTP-Bund spread widening and business confidence negatively affected."

On the other hand, there was still a small chance of a centre-right victory at the ballot box.

One small silver lining to all of the above was that the risk that populist parties would band together was considered "very remote", although it was 'tail-risk'.

Furthermore, even the main advocates of a euro exit had been steadily softening their anti-euro rhetoric.