The recovery of the world economy continues - The world economic recovery continued in the first half of 2010. The pace of growth was rapid in the emerging economies, robust in the United States and Japan, but still modest in Europe. International trade regained much of the ground lost since the peak of 2008. In the advanced countries large margins of spare capacity kept inflationary pressures in check.
The outlook is better for the countries where domestic demand is strong - The latest projections of international organizations and private forecasters point to a slowing of growth in the coming months. The future evolution of the world economy still depends in part on the expansionary anti-crisis policies; it is hampered by the poor labour market situation and recurrent financial market tensions. The outlook is better for the countries where consumption and investment demand are more robust.
In the declaration concluding the Toronto summit meeting in June, the G20 leaders placed safeguarding and strengthening the recovery among the highest priorities and emphasized the risks associated with the widening of deficits and public debts. The advanced countries pledged to cut their deficits by half by 2013 and to stabilize or reduce their debt-to-GDP ratios by 2016.
Growth and inflation in the euro area remain moderate - In the euro area GDP grew by only 0.2 per cent in the first quarter, following the modest 0.1 per cent increase in the last quarter of 2009. Economic activity was sustained largely by stockbuilding. Excluding this component, internal demand declined again; private consumption stagnated. The sharp pickup in imports more than offset the contribution of exports to GDP growth. According to the cyclical indicators, economic activity strengthened very substantially in the second quarter, buoyed mainly by foreign demand.
Twelve-month consumer price inflation in the area rose by about half a percentage point in the first few months of the year, driven by an acceleration in the prices of energy goods. In June it reached 1.4 per cent. In the absence of demand-side pressures, the growth of the index net of the more volatile components has held at just under 1 per cent since the start of the year. Professional forecasters have been revising their inflation projections for 2010 upwards since April, and in June set them at around 1.4 per cent.
The financial market tensions in the area prompted coordinated public interventions - In the second quarter of 2010 concern about the sustainability of some euro-area countries' public debts was reflected in severe financial market turbulence. Equity prices fell, risk premiums on corporate bonds rose, and yields on the public bonds of the countries deemed to be least at risk declined. In response to these tensions the European Union launched an important financial support mechanism, to which the IMF will be able to make additional resources available and which can be activated to handle crisis situations; moreover, many countries have adopted or announced budgetary adjustment measures.
In Italy the economy is growing, but the recovery is slow - Italy's GDP grew by 0.4 per cent in the first quarter of 2010. The largest contribution came from exports. By contrast, domestic demand remained weak, with investment in machinery and equipment modest, while construction investment and household consumption were slack. According to the cyclical indicators, economic activity continued to grow in the second quarter, again led by exports.
Investment is held down by uncertainty about the future conditions of demand and the still ample margins of spare capacity. The recovery in industrial activity nevertheless is proceeding: production grew by 1.7 per cent in the first quarter and appears to have increased by 2 per cent in the second, orders, especially from abroad, have expanded, and price competitiveness has improved. Manufacturing productivity grew in the first quarter compared with a year earlier, partly owing to the reduction in hours worked. Firms' profitability increased in the twelve months ended in March after two years of practically uninterrupted decline. However, the index of industrial production is still nearly 20 points below the 2008 peak.
Employment is struggling to recover - The upturn in economic activity has not been strong enough to reverse the trend in employment, which nevertheless ceased to contract in the first quarter. Provisional data indicate no significant improvement in the second. The seasonally adjusted unemployment rate is 8.7 per cent, while the number of hours of wage supplementation has diminished slightly.
Consumer price inflation remains historically moderate - The twelve-month rate of consumer price inflation, after an uptick at the start of the year owing to energy products, settled at around 1.5 per cent, both including and excluding the more volatile components. Price rises have been curbed by persistently weak household consumption, and in June the rate came down to 1.3 per cent. Since the beginning of the year the twelve-month increase in the prices of non-food and non-energy goods has held below 1 per cent, and service price inflation has remained historically low. As measured by the harmonized index for the euro-area countries, the inflation differential between Italy and the rest of the area was closed in March after being almost constantly positive for two years.
The objectives for the Italian public finances have been confirmed - At a time of severe tensions on the government securities markets of some euro-area countries, the Government has brought forward Italy's budgetary adjustment measures, now under discussion in Parliament, to ensure attainment of the objectives. The measures are designed to reduce net borrowing compared with that on a current legislation basis by €12 billion in 2011 and €25 billion in both 2012 and 2013.
The forecasts for growth and inflation in Italy - This year and in 2011 the recovery in Italy is likely to be sustained by export demand, as in similar cyclical phases in the past. World trade, which international organizations now expect to expand more rapidly than had been forecast in January's Economic Bulletin, should boost the growth of the Italian economy to 1 per cent in both 2010 and 2011. The discontinuation of the fiscal stimulus measures in the second half of 2010 and the restrictive effects of the budgetary adjustment in 2011 will result in a slowdown in economic activity compared with the first six months of this year. Driven by the depreciation of the euro, inflation - measured by the harmonized index of consumer prices - will average 1.5 per cent this year and reach 1.9 per cent in 2011; excluding the energy and food components, the index is forecast to increase by an annual average of about 1.5 per cent in 2010-11. The strong cyclical improvement in labour productivity will trigger a considerable slowdown in unit labour costs in the private sector and a sharp fall in the domestic component of inflation, which will remain below 1 per cent this year and 2 per cent on average in 2011.
The margin of uncertainty over the international recovery remains substantial, in both directions: the emerging economies could accelerate further, but any overheating would trigger restrictive policies; in the advanced economies, once the stimulus measures that governments introduced at the start of the crisis have run their course, the solidity of the domestic components of demand will be crucial. Corresponding uncertainty surrounds the scenario presented here for the Italian economy.
