The global upswing continues - The expansion of global economic activity and world trade is proceeding at a moderate pace. There are signs of economic strengthening in the United States, assisted by the decreased uncertainty over budget policy. The tapering of the Federal Reserve's purchases of securities has not heightened volatility on the financial or foreign exchange markets. The emerging economies continue to grow, although with some downside risks owing to less expansive global financial conditions.
The euro area is experiencing a modest recovery with low inflation - A modest expansion has begun in the euro area, but it remains fragile. The sluggishness of economic activity is reflected in the extremely moderate pace of consumer price increases, resulting in higher real interest rates and a slower reduction of private and public debt. Given inflation persistently below the definition of price stability, the subdued growth of money and credit, and the weakness of economic activity, the Governing Council of the ECB lowered official rates in November; it has firmly reiterated that it will keep them at their current levels or lower for an extended period of time. The governing Council further confirmed that it will use all the instruments available in order to maintain an accommodative stance of monetary policy.
Financial conditions improve - Conditions on European and Italian financial markets have improved further, thanks to the prospects of economic recovery, the accommodative stance of monetary policy, the progress made in euro-area governance and the stabilization of the domestic situation in Italy. Long-term interest rates on Italian government securities have come down and the spread vis-à-vis German ten-year yields has narrowed to about 200 basis points. Non-residents' interest in Italian financial assets has revived.
The outlook for Italy brightens ... - Italy's GDP stopped falling in the third quarter of 2013, sustained by exports and stock-building, and business surveys and the performance of industrial production suggest barely positive growth in the fourth. The indicators of business confidence rose further in December, regaining the levels recorded at the start of 2011.
... but is markedly uneven, and employment is still weak - However, cyclical condi-tions vary substantially according to the type and the geographical location of firms. The improved prospects for large industrial firms and exporters contrast with the still unfavourable situation of smaller businesses, service firms and firms in the South. Despite some signs that employment is stabilizing and an increase in the number of hours worked, labour market conditions remain difficult. The unemployment rate, which normally responds to cyclical developments with a lag, rose to 12.3 per cent in the third quarter and is estimated to have increased again to an average of 12.6 per cent in October and November.
Inflation is going down - Inflation has continued to fall in Italy, more sharply than had been forecast just a few months ago, to a twelve-month rate of 0.7 per cent in December. Core inflation, net of the most volatile components, has also declined, to 0.9 per cent. Slack demand has held down firms' prices more markedly than in the past. The VAT increase in October was only very partially passed through to final prices.
The external surplus increases - The current account balance turned positive in 2013, and the surplus should continue to grow, despite the increase in imports spurred by the expected gradual strengthening of economic activity. The improvement in the balance between 2010 and 2013 reflected not only the recession-induced fall in imports but also an increase in exports.
Credit conditions are still tense - The cost of banks' bond issues has diminished in the main euro-area economies, and in Spain and Italy in particular. Lending to firms has not yet benefited from the improvement in financial market conditions. In the three months ending in November it contracted by more than 8 per cent on an annual basis; this factor continues to hamper the economic recovery. Lending is held back by the low demand for investment purposes and, on the supply side, by high credit risk and the pressure exerted on banks' balance sheets by the recession.
Progress continues on the path to the Banking Union - The comprehensive assess-ment of the largest euro-area banks by the ECB and the national supervisory authorities can attenuate the fragmentation of the financial markets and benefit the banking and credit system in Italy by increasing the transparency of balance sheets and reducing uncertainty about the quality of assets. On 18 December the Council of Economic and Financial Ministers reached a compromise agreement on the characteristics of a single bank resolution mechanism; the EU Council has asked that the mechanism be approved by the European Parliament before the end of the current legislature in May. An effective single resolution mechanism marks an essential step towards completing the Banking Union.
General government net borrowing is apparently stable - The state sector borrowing requirement rose sharply in 2013, reflecting several extraordinary factors, such as the payment of general government debt arrears related to current expenditures and the lapsing of the effects of the measure on the centralized Treasury account, which had kept the borrowing requirement down in 2012. On the basis of the available data, it is estimated that general government net borrowing was close to the threshold of 3 per cent of GDP, notwithstanding the further contraction in output. According to the Government's official forecast, which the Stability Law for 2014 takes into account, net borrowing will decline each year from 2014 to 2016.
Our projections indicate a return to moderate growth in 2014-15 ... - The projections for the Italian economy for the next two years published in this Bulletin confirm the indications that we published a year ago and reiterated last July, which foresaw a cyclical turning point at the end of 2013. This year we expect there to be a moderate economic recovery, which should accelerate next year, albeit slightly. After falling by 1.8 per cent in 2013, GDP is projected to grow by 0.7 per cent this year and by 1 per cent in 2015.
... driven by foreign demand and the gradual recovery of investment - The recovery is expected to be led by exports and by the gradual expansion of productive investment, favoured by the improved outlook for demand and increased corporate liquidity, thanks in part to the payment of overdue general government commercial debts. Credit conditions look set to remain tight, however. The ratio of investment to GDP is expected to remain below its historical average. Consumption is expected to stay weak. The improvement in the economy is likely to affect conditions in the labour market with the usual lag: employment is not projected to begin growing again before 2015.
Inflation is expected to stay at low levels - The forecasts for inflation have been revised down-wards, to a little over 1 per cent for this year and around 1.4 per cent in 2015. Domestic price inflation, measured by the GDP deflator, is also expected to be moderate, owing to the impact on firms' pricing policies of ample spare production capacity.
Growth and price dynamics remain subject to downside risks - In this forecasting scenario, the risks for growth are again mostly on the downside. If the conditions of access to credit were to remain restrictive for longer than posited and the payment of general government debt arrears were to be deferred, the recovery in investment would be delayed. The resurgence of fears about the determination of the national authorities to continue with fiscal consolidation and structural reform, or of the European authorities to move ahead with the reform of the Union's governance, could impact unfavourably on long-term interest rates. The risk of generalized deflation remains modest overall, but the fall in inflation could be larger and more persistent than forecast, especially if weak demand were to weigh on expectations.
