The world recovery proceeds, albeit unevenly - The world economic recovery proceeded in the last few months of 2009 and the early part of this year, although unevenly and at a pace that varied across countries and regions. The growth of gross domestic product accelerated in the United States, Japan and the main emerging countries in the fourth quarter. The recovery proceeded, moderately, in the euro area. In all the main advanced economies activity continues to be sustained by expansionary monetary and fiscal policies. In some, there has been a temporary boost from the rebuilding of stocks. Consumption is being held back by high unemployment, investment by uncertainty and substantial spare capacity. In the main emerging countries, by contrast, growth continued to be buoyed by the robust expansion of domestic demand.
In the forecasts of private analysts, GDP growth should come to about 3 per cent in the United States in 2010, 2 per cent in Japan and 1 per cent in the euro area, while gains of 10 per cent in China, 8 per cent in India and 5½ per cent in Brazil are expected. The IMF projections released in January, now being revised, are broadly similar. World trade is expected to start growing again, at a rate of about 6 per cent, after last year's 12 per cent contraction.
In the euro area, domestic demand remains sluggish. Industrial production and business confidence have improved in recent months, most notably in Germany, largely as a consequence of the upswing in export orders; but retail sales have continued to decline and consumer confidence appears to have slipped again.
Monetary policies remain expansionary - Inflation in the main advanced economies is quite moderate. Monetary policies are still highly expansionary. The Eurosystem is continuing to phase out its unconventional operations - no longer needed to the same extent as in the past, thanks to improved financial market conditions; it is still offering support for banking system liquidity and the economic recovery.
Strains in the government securities markets are circumscribed - Thanks in part to the availability of abundant liquidity on the markets, share prices have rallied moderately, and the risk premiums on corporate bonds and the emerging countries' sovereign debt have held stable or diminished slightly. The worries over Greece's public debt have only affected the securities markets of the leading European countries to a limited extent. On 11 April the governments of the euro-area countries announced the terms of a financial support programme for Greece that can be activated at need, to be designed and co-financed with the International Monetary Fund.
The high volatility of risk premiums on government securities since the end of 2009 testifies to investors' concern over the public finances, which have deteriorated sharply in all the advanced countries as a consequence of the crisis. The fiscal policy stance should remain expansionary in most countries in 2010, but plans for deficit reduction have been announced for the years to follow. These plans must be credible in order to prevent interest rates from spiking and ensure the sustainability of the public finances.
In Italy the recovery is still feeble - Italian GDP declined slightly in the fourth quarter of 2009. Consumption stagnated and investment (especially in construction) contracted further, while exports did not continue the modest gains of the third quarter. All in all, the expansion of economic activity in the second half of the year was modest.
The latest data on industrial production and the findings of business opinion surveys indicate a brisker pace of activity in the first few months of 2010. In particular, firms' assessment of orders and their expectations for production have improved. The phase of inventory reduction appears to have come to an end. There are also signs of improving expectations in the construction industry.
However, consumer confidence has weakened, reflecting increasing worry over the economic picture and the labour market outlook. The contraction of employment, which reduced households' disposable income perceptibly last year, continued in the early months of 2010. Firms' propensity to invest is being curtailed by the drop in profits and low capacity utilization. Firms continue to report difficulty in access to credit, even though the banks have ceased tightening supply conditions. Going forward, the factors responsible for the slackness of domestic demand could weigh on the speed and strength of the recovery.
Export difficulties reflect structural lags - Given the persistent weakness of domestic demand, the expansion in exports has so far been insufficient, by itself, to bring the economy back to high levels of growth. During the most acute phase of the crisis (from the second quarter of 2008 to the second quarter of 2009), the volume of goods exports contracted by a quarter, the same as in Germany and more than in France. In the second half of 2009, while world trade expanded by 9.3 per cent, exports gained just 2.6 per cent in Italy, compared with 10 per cent in Germany and 5.4 per cent in France. In January of this year Italian exports showed stronger signs of recovery. In value terms the data paint a very similar picture. The lag with which our exports have followed world demand growth depends on the same factors that have penalized Italy in the past: sharper losses of price competitiveness than in France and Germany, an industrial specialization tilted towards traditional manufactures and limited presence in the most dynamic emerging markets, such as those of Asia.
Inflation has steadied - Consumer price inflation rose gradually in recent months to a rate of about 1.5 per cent, close to that of core inflation, as the statistical effect on the twelve-month inflation rate produced by the sharp fall in energy prices in the second half of 2008 has now worn off completely. Inflation expectations for 2010 are at about the same level.
The worsening of the public accounts in 2009 was due mainly to automatic stabilizers - General government net borrowing rose from 2.7 per cent of GDP in 2008 to 5.3 per cent in 2009, which was in line with the official projections made last July and confirmed in subsequent months. The increase in the deficit reflects the large increase in primary expenditure and the fall in revenue, though this was less pronounced than that in nominal GDP. Budget policy responded to the crisis mainly by reallocating resources towards expenditures better suited to mitigating the social costs of recession and sustaining aggregate demand.
The deterioration in the public finances was less pronounced in Italy than in the other main advanced countries, in some of which the cost of major bank rescue operations weighed heavily. Nevertheless, the ratio of public debt to GDP rose by 9.7 percentage points to 115.8 per cent, reflecting not only the large borrowing requirement but also the fall in nominal GDP.
The Stability Programme update sets the objective of bringing the deficit below 3 per cent in 2012 -
The Stability Programme update presented by the Government at the end of January confirms the forecast of net borrowing equal to 5 per cent of GDP in 2010. This implies an appreciable increase in revenue and a definite slowdown in primary expenditure. The deficit objectives set in the Stability Programme for 2011 and 2012 are respectively 3.9 and 2.7 per cent of GDP, in line with the deadline of 2012 set by the EU Council for Italy to eliminate its excessive deficit.
