The growth of the world economy slows - The pace of global economic growth showed signs of slowing during the third quarter. The IMF predicts less buoyant economic activity in the second half and a slight further slowdown in 2011 in both the advanced and the emerging countries, owing to the completion of restocking and the waning of the main fiscal stimulus measures. Price inflation is expected to remain generally subdued in the advanced economies; inflationary pressures are seen as persisting in the emerging countries.
In this cyclical situation, the central banks of the advanced countries have maintained or accentuated the already strongly expansionary stance of monetary policy. In some emerging economies the authorities continued to tighten monetary conditions.
Equity markets improve; some euroarea government bond markets come under renewed strain - The main stock markets rallied in the third quarter. At the beginning of August strains reappeared on the government bond markets of Greece, Ireland and Portugal, triggered by fresh concern about the state of the public finances and banks of those countries. The already ample yield spreads over the German ten-year bond rose further, peaking at the end of September; in the first half of October the tension abated, most markedly in Greece, where the spread fell back to its mid-June level. The general shift of portfolios into assets deemed to be less risky (the so-called flight to quality) also caused a widening of the spread between Italian government securities, whose yield remained virtually unchanged, and German government securities, whose yield declined.
Some measures for the reform of financial regulation are implemented - Action has proceeded with a view to revising the regulatory framework and architecture of the supervision of intermediaries and markets. The European Parliament approved the creation of a European system of financial supervision. The Basel Committee revised banks' capital requirements, acting on the recommendations of the Heads of State and Government of the G20 countries.
Growth rates in the euro area are uneven and tending to slow - The growth differentials between the major euroarea countries are tending to widen. In the area as a whole, GDP grew by 1 per cent in the second quarter with respect to the previous period, compared with 0.2 per cent in the first. The pickup reflected the acceleration in exports and investment, while household consumption, though continuing to expand, was still held back by uncertainty over the employment outlook. The increase in GDP was much more pronounced in Germany (2.2 per cent in the second quarter); since the cyclical trough, the German economy has grown by 4.2 per cent, about three points more than the average for the other euro-area countries; in France the cumulative growth has been only 1.9 per cent and in Italy 1.3 per cent. German firms' heightened competitiveness in the more dynamic markets has been reflected in much more rapid export expansion than that of the other countries of the area.
The progressive decline of the €-coin indicator, which stood at just over 0.3 per cent in September on a three-month basis, points to a more moderate expansion in the area's GDP in the third quarter. The slowdown is corroborated by the other cyclical indicators available and by business opinion surveys. According to the professional analysts polled by Consensus Economics in September, the area's GDP will grow by 1.6 per cent this year and by somewhat less than that in 2011. These forecasts are in line with the estimates by the major international organizations and the recent projections by the European Central Bank.
The outlook for inflation remains stable, thanks in part to the moderation of the domestic cost component. The indicators of medium and longterm inflation expectations have been declining since the start of the year; their levels remain compatible with the objective of price stability.
In Italy, the cyclical recovery continued in the second quarter ... Italian GDP growth accelerated slightly in the second quarter compared with the first, to 0.5 per cent. A further robust expansion in exports was accompanied by a sharp pick-up in investment in machinery and equipment, which benefited from tax incentives due to expire at the end of June. On the other hand, household consumption continued to stagnate and construction investment contracted again.
... and the third - The upswing in industrial production, under way since the spring of 2009, continued in the third quarter this year, according to Istat data through August and our estimates for September. The surveys of manufacturing firms point to a continuation of the cyclical recovery in the coming months, albeit at more modest rates. By contrast, there are no clear signs of an inversion of the downward trend of activity in construction.
On the demand side, exports fell in July and appear to have done so again in August. Retail sales remain flat; new car registrations rose a little during the summer after slumping in the wake of the termination of the tax incentives. The weak growth of incomes and the slowness with which employment is recovering continue to dampen household consumption. In the labour market, positive signs, such as the slight rise in the number of persons employed in the first half of the year and the intensification of recruitment by firms, are mixed with more uncertain signals, such as the expected staffing levels reported by recent surveys of firms.
The professional analysts polled in September by Consensus Economics expect Italian GDP growth to average 1 per cent this year, in line with the forecast published in last July's Economic Bulletin and the projections recently released by the European Commission and the IMF.
The objective of a slightly reduced budget deficit in 2010 is confirmed - At the end of September the Government updated its forecasts for the public finances. The new estimates are in line with the consolidation path agreed at European level and confirmed in May. Net borrowing is forecast to decline slightly this year, to 5 per cent of GDP, while the debt-to-GDP ratio is expected to continue to rise and reach 118.5 per cent. The data available for the first nine months of 2010 point to a small reduction in the deficit.
The public finances are forecast to continue improving in the next three years - According to the Government's estimates, the improvement in the public finances will gain pace in 2011, with the primary balance coming back into surplus at 0.8 per cent of GDP. From 2012 onwards net borrowing is expected to fall below 3 per cent of GDP and the debt to start declining again in relation to GDP. The fiscal adjustment for the next three years is based almost entirely on measures to curb primary expenditure, especially capital spending.
