The global economy grows, but tensions around the world pose a risk - After a setback in the first quarter of the year, global economic activity appears to have regained strength, in particular in the United States, where growth has resumed, and in China, where the slowdown has come to a halt. However, the risks associated with geopolitical tensions in some of the oil-producing countries have increased; any further intensification would have repercussions for the supply and prices of energy products, economic activity and world trade.
Financial market conditions have improved - Conditions on the international financial markets have picked up in the last three months, although there have been fluctuations and heightened uncertainty in recent weeks. The greatest contribution to the good performance of share and bond prices has come from the reduction in risk premiums in a situation of extremely low volatility. Capital flows to the emerging economies have resumed.
In the euro area growth is moderate and inflation is falling further - In the euro area economic growth is still weak, intermittent and uneven among the member states. Inflation continues to fall more sharply than expected, even excluding the most volatile components such as energy and unprocessed food products. According to the latest Eurosystem projections, it will continue to be low over the next two years, at a level inconsistent with the definition of price stability.
The ECB introduces targeted refinancing operations and a negative interest rate on the deposit facility - The Governing Council of the ECB has taken steps to ease monetary conditions further and to support lending. A negative interest rate on banks' deposits with the Eurosystem has been introduced for the first time in order to foster the circulation of liquidity and counter the appreciation of the euro. Banks will be able to access new targeted longer-term refinancing operations (TLTROs) at advan-tageous conditions provided they increase lending to households and firms. The Governing Council has reaffirmed its readiness to introduce further stimulus measures, including a securities purchase programme, should the medium-term outlook for inflation make it necessary.
The markets have responded to the monetary policy measures - The monetary policy measures have had an immediate impact: market interest rates have fallen, the euro has depreciated, and capital flows to many euro-area countries, including Italy, have increased. As the banks progressively make use of TLTROs a further expansionary effect may ensue.
In Italy the outlook is still fragile ... Economic activity in Italy is struggling to return to growth. During the winter months economic activity reflected the contraction in energy production, which was due to some extent to the mild weather, and the continuing weakness of the construction industry. In May industrial production dipped suddenly through-out the euro area, partly owing to calendar effects; the information available suggests that the economy was basically stagnant in the second quarter as well..
... despite some encouraging signs - The continuing stagnation of economic activity is in contrast with the business and household confidence indicators, which have been picking up since the spring. At the beginning of the year some positive signals emerged from national demand. Household spending rose for the first time since the beginning of 2011, albeit marginally. There was also an increase in investment in machinery and equipment, which responds promptly to changes in the outlook for demand. Business opinion surveys carried out in recent months show an improvement in investment plans, notably in industry.
Employment stabilizes - The decline in employment under way since the second half of 2012 virtually halted last winter. Labour utilization remains low, however, hampering the recovery of demand in the short term. The unemployment rate has risen once more following the increase in labour market participation.
Inflation is close to zero - Inflation has fallen further in Italy too, and in June the HICP reached 0.2 per cent. Alongside the drop in energy and unprocessed food prices, there has been a decrease in core inflation, still affected by ample spare capacity.
Credit is still slow to improve - The banking markets are becoming progressively less fragmented, as borne out by the reduction in the cost of wholesale funding and in CDS spreads for Italian banks. There are signs of improvement in credit conditions, but they are still faint and uncertain. The latest business surveys indicate that access to bank credit is becoming less difficult; lending to the private sector continues to diminish, however, partly owing to the weakness of the economy. The cost of credit for non-financial corporations is falling, but is still some 70 basis points higher than the average for the euro area.
Our projections point to hesitant growth ... Our projections for 2014-15 presented in this Bulletin suggest a moderate recovery of the Italian economy, but not without considerable uncertainties. GDP is forecast to expand by 0.2 per cent this year, with downside risks, rising to 1.3 per cent in 2015. Inflation is expected to be 0.4 per cent this year and to rise to 0.8 per cent next year.
... conditional on a strengthening of domestic demand - The gradual return to growth depends on the good performance of international trade and the revival of domestic demand, in particular of investment, which will benefit from the diminishing restrictive effects of the fiscal adjustment of previous years, the fading of uncertainties regarding demand, and the further easing of financial tensions. Domestic demand should also draw strength from the support measures for lower incomes and the accelerated payment of general government commercial debts.
The balance of payments continues to improve - The acceleration of import growth is not expected to prevent Italy's balance of payments from improving further: the current account surplus is forecast to widen to almost 2 per cent of GDP thanks to the steady expansion of exports.
Monetary policy will support economic activity - Economic activity should also draw support from the expansionary stance of monetary policy. It is estimated that the movements in interest and exchange rates recorded to date will make a positive contribution to GDP growth of about 0.5 percentage points to the end of 2016, with TLTROs having a further positive effect.
This scenario is based on national and European policies to support growth - The forecasting scenario outlined here assumes that consistent national economic policies will be implemented to support growth and boost household and business confidence, and also that the recovery will firm up throughout the euro area. The risks associated with less robust growth in the emerging economies, owing among other things to international tensions, and with the possibility that the present exceptionally favourable financial market conditions prove short-lived should not be underestimated. In this situation, it is crucial to ensure that the medium-term inflation expectations underlying price and wage formation remain stable.
