The global expansion continues, but new risks emerge - Global output and trade are continuing to expand, but with signs of weakness in some emerging countries, among which China's private sector leverage represents a risk. The tensions with Russia kindled by the crisis in Ukraine have had a limited impact to date; if they were to intensify, they could have repercussions on the euro area through energy prices and supplies and, to a lesser extent, trade with Russia.
In the euro area, financial markets are improving rapidly... In euro-area financial markets, the rise of bond prices and the reduction in risk premiums have gained pace. The improvement is attributable mainly to the dissipation of fears of a break-up of the Monetary Union and to the progress made in macroeconomic adjustment in member countries, but it also reflects the large inflow of capital exiting the emerging countries in search of safer investments. In Italy, the nominal yields on ten-year BTPs fell to the lowest level since their introduction in 1991. On 14 February Moody's revised the outlook for Italy from negative to stable.
... but inflation is lower than forecast - With economic growth still moderate and uneven, inflation in the euro area remains well below recent forecasts. In March it fell to 0.5 per cent, reflecting both the core and the volatile components; according to the Eurosystem's projections, inflation could remain below the definition of price stability until 2016, making it more difficult to adjust imbalances and reduce debt in the euro-area countries. The Governing Council of the ECB is resolute in its commitment to using also unconventional instruments, such as market purchases of bonds, in order to cope effectively with risks of a too prolonged period of low inflation.
In Italy, there are signs that the recovery is slowly spreading - In Italy the performance of industrial production and the results of business surveys indicate that economic activity has continued to expand at a moderate pace in the first few months of the year. The strength of the recovery differs by category of firm and geographical area, but it appears to be spreading gradually. Surveys indicate that the improvement in the prospects of large industrial firms and export-oriented companies is accompanied by initial positive signs for service businesses as well. The situation remains less favourable in the South.
Export orders grow - The latest cyclical indicators suggest that exports continued to perform well in the first quarter. The outlook remains favourable: firms report that, overall, foreign orders are on the rise.
Investment turns upwards but consumption remains weak ... Investment has turned slowly upwards. Firms' assessments of investment conditions are now comparable with those they made before the sovereign debt crisis. There are also signs that household spending is stabilizing, with a modest upturn in new car registrations and gains in household confidence. Nevertheless, consumption remains well below its 2007 level (by nearly 8 per cent) and is still dampened by the employment outlook.
... and difficulties in the labour market persist - Despite some improvement, labour market conditions remain difficult. The contraction in employment eased slightly in the second half of 2013 and hours worked per employee rose in industry, but the unemployment rate hit 13 per cent in February. If the recovery were to continue at the moderate pace currently projected by most forecasters, the number of persons in work would begin to grow only gradually and not before the end of the year.
Inflation comes down sharply in Italy too - As in the euro area, in Italy harmonized inflation has continued to decline faster than projected in the past few months, falling to 0.3 per cent in March. Core inflation reached 0.9 per cent, among the lowest levels on record. The downward pressures mainly reflect the weakness of demand; the decline in producer prices and firms' declared intentions of making only very minor adjustments to their prices in the coming months suggest that these pressures will persist.
The fragmentation of banking markets diminishes but does not vanish ... The rapid improvement in the financial markets has not yet resulted in significantly reduced fragmentation of the conditions for banks' funding on wholesale markets. The largest Italian banks' CDS spreads have diminished, consistently with those on government securities, but they are still more than 60 basis points higher than those of French and German banks.
... and credit conditions are improving very slowly - In the latest surveys firms report a slight attenuation of the restriction of loan supply conditions. The decline in lending to firms has not yet reversed. The cost of credit for non-financial corporations in Italy remains about 80 basis points higher than the euro-area average.
The single mechanism for resolving bank crises is approved - The comprehensive assessment of the main euro-area banks by the ECB and the national supervisory authorities is under way. The approval of the Single Resolution Mechanism by the European Parliament makes it possible to advance towards Banking Union and to standardize not only supervisory responsibilities but also those for crisis resolution. It now remains to move rapidly ahead in defining the operational aspects regarding the financial capacity of the single resolution fund.
The measures to support firms' liquidity have helped to sustain economic activity - According to our surveys, payments of general government's overdue commercial debts have provided support for investment by firms and the recovery in economic activity. According to the end-March report by the Ministry for the Economy and Finance, the payments (including tax rebates) made in accordance with the legislation approved last year exceeded €23 billion. Qualitative surveys indicate that debt payment times were trimmed in the course of 2013.
The Government has published its Economic and Financial Document - On the basis of data released by Istat, in 2013 general government net borrowing remained at 3.0 per cent of GDP, despite the contraction of economic activity. According to the Government's plans, set out in the 2014 Economic and Financial Document, net borrowing will fall to 2.6 per cent of GDP in 2014 and 1.8 per cent in 2015; on a cyclically adjusted basis it is expected to fall to 0.6 per cent this year and 0.1 per cent next year, and to be completely eliminated in 2016. The Government has also announced that it will shortly introduce measures to reduce the tax wedge permanently (a reduction in personal income tax for low-income workers and a reduction in the regional tax on productive activities for firms). The resources will be obtained mainly through expenditure cuts.
The incipient recovery must gain traction - Despite early signs of an improvement in domestic demand, the economic situation remains fragile. If there is to be a progressive reduction in unemployment, especially among young people who have been hit hardest by the crisis, there will have to be lasting growth and a heightened capacity for innovation among firms. Economic policies must sustain the confidence of firms and households, proceed with reforms and ensure that the ratio of debt to GDP is reduced, at a pace that will depend not only on the prudent management of the public finances but also on economic growth. In the euro area it remains essential to combat excessive disinflation.
