ummary
The world economy slows in the fourth quarter of 2011 - Global economic growth lost strength in the last quarter of 2011. Since the turn of the year the deterioration appears to have come to an end, and growth expectations have generally stabilized. In the advanced countries aggregate demand expansion is impeded by deleveraging, both public and private.
The Eurosystem acts decisively to provide liquidity support to banks - In order to sustain credit to the economy and alleviate the funding difficulties of banks caused by the sovereign debt tensions and aggravated by the large volume of bank bonds maturing in the first half of 2012, the ECB conducted two three-year refinancing operations, in December and February, at a fixed rate of 1.0 per cent and with full allotment. It also broadened the range of eligible collateral and halved the reserve ratio. The net injection of liquidity into t he system amounted to some €500 billion, which was provided directly to a large number of banks
Sovereign debt strains abate in the first quarter ... - Thanks to the action of the ECB, the measures enacted by several countries, notably Italy, and the agreement reached on financial assistance for Greece, the strains in the financial markets of the euro area eased considerably in the first few months of the new year. Government bond, interbank yield and bank CDS spreads all narrowed sharply.
... but worsen somewhat in April - In April government securities spreads increased significantly again, though remaining far below their January highs. Market concerns over the outlook for some euro-area countries began to resurface. Fears of a more pronounced slowdown in world economic growth accentuated the preference for the securities of the reputedly safest countries.
In the euro area, the contraction of economic activity eases in the first quarter - According to cyclical indicators, the contraction in euro-area economic activity was more moderate in the first quarter. The €-coin indicator calculated by the Bank of Italy recorded an improvement on last December's low and in March registered barely negative levels. Twelve-month consumer price inflation came down from 3.0 per cent in the fourth quarter of 2011 to 2.6 per cent in March.
In Italy, GDP continues to slide ... - Italian GDP declined by 0.7 per cent between the third and fourth quarters, as the decline in domestic demand was only partially offset by the positive contribution of foreign trade, itself due to a fall in imports while exports were steady. Cyclical indicators point to a further contraction of economic activity in the first few months of 2012. Exports appear to have held broadly stable in the first two months.
... but with some signs of stabilization - The business survey conducted by the Bank of Italy together with Il Sole 24 Ore in March and the qualitative indicators derived from surveys suggest that although the economic picture is still poor, the cyclical deterioration has moderated. In particular, more favourable assessments of export orders have emerged.
The employment recovery comes to a halt in the closing months of 2011 - After two years of contraction, the Italian labour market showed signs of recovery in 2011, with a year-on-year increase of 0.4 per cent in the number of persons employed and a marked reduction in the number of wage supplementation hours authorized. However, the demand for labour stagnated in the fourth quarter, while the supply continued to grow rapidly. The feebleness of demand persisted in the early months of 2012, the unemployment rate rose and wage supplementation hours began to grow again.
Declining incombe is holding back consumption - Households remain cautious on spending, restrained by declining disposable income and the state of the labour market. Consumption remained weak in the early months of this year too, especially of durable goods. Business investment is being affected by ample idle capacity and stagnant domestic demand, as well as by difficulty in accessing credit, although this has eased somewhat.
Core inflation remains moderate. Prices reflect the increases in energy costs and indirect taxes - Consumer price inflation, which rose to just over 3.0 per cent on a twelve-month basis in the last quarter of 2011, remained at this level on average for the first quarter of 2012. Core inflation, net of the most volatile components, stayed at around 2 per cent. Price trends mainly reflect the rise in energy costs and indirect tax increases, which in turn were reflected in the projections of the professional forecasters for 2012, revised upwards in recent months.
Difficulty in accessing credit were countered by ECB liquidity injections - In December lending to firms recorded a contraction; surveys indicated a tightening of credit supply in connection with banks' fund-raising difficulties abroad. The refinancing operations conducted by the ECB have averted a more drastic scenario: they should allow credit supply conditions to return to normal in the months to come. Signs to this effect have come from the latest surveys of firms. Weak demand and the deterioration in borrowers' creditworthiness will continue to affect credit growth in the coming months.
Banks' profitability is down, but they have strengthened their capital base and regained access to the market - The deterioration of the economy had repercussions on credit quality and increased the flow of bad debts from lending to firms. In 2011, the profitability of the major banking groups declined; nevertheless, they have continued to strengthen their core tier 1 capital. In December the leverage ratio of these groups was significantly lower than the average of a sample of large European banks. Several Italian banks regained access to the wholesale funding market and resumed unsecured international bond issues.
In 2011 the government deficit fell; a further marked improvement is expected this year - 2011 general government net borrowing declined to 3.9 per cent of GDP, 0.7 percentage points less than in 2010. Net of interest payments, a surplus of 1 per cent of GDP was recorded. This limited to 1.5 percentage points the increase in the ratio of government debt to GDP, which reached 120.1 per cent. Following the adoption of adjustment measures in the second half of the year, the debt to-GDP ratio is expected to begin declining in 2013; the outturn for 2012 is expected to show a significant improvement, despite the forecast decrease in GDP.
Economic policy aims to create the conditions for growth, but there are still serious risks at European and global level - There is still great uncertainty over the economic outlook. The possibility of a recovery beginning towards the end of the year and continuing in 2013 depends above all on the performance of the financial markets and the interest rates on government securities. These rates have approached those postulated in the more favourable forecasting scenario set out in the January Economic Bulletin, but volatility remains high. The recently approved measures for liberalization and administrative simplification can increase potential GDP growth and improve expectations. The proposed reform of the labour market is designed to reduce segmentation by rationalizing income support measures and readjusting the relative advantage of the different forms of labour flexibility. Nevertheless, substantial risks remain, namely the danger of a resurgence of the tensions in the European financial markets and a more pronounced slowdown in world trade.
