Economic Bulletin No. 4 - 2018

Risks to the global economy increase

Growth remains solid in the main advanced economies, though world trade has slowed significantly and financial and currency tensions have surfaced in the most vulnerable emerging countries. Global risks have increased, stemming from the possible repercussions of protectionist measures on corporate investment and from the potential increase of financial tensions in the emerging economies.

Monetary conditions remain accommodative in the euro area

Economic activity in the euro area continues to expand, though more slowly. Inflation has remained at around 2.0 per cent, but core inflation is struggling to gain ground. The ECB's Governing Council reduced its net asset purchases in October and confirmed its intention to cease them at the end of 2018; it also reasserted the need to maintain an ample degree of monetary accommodation as long as necessary.

Growth continues in Italy, but appears to slow in the third quarter

In Italy, the marked expansion in investment helped to sustain growth in the second quarter, while exports remained stable owing to weak global trade. The available cyclical indicators suggest that in the third quarter, GDP growth slowed to about 0.1 per cent compared with the previous quarter, reflecting the stagnation in industrial production, continued growth of services and a moderately positive contribution from the construction sector.

Confidence indicators for the building sector, households and manufacturing firms were still favourable; however, the latter sector in particular registered less optimistic assessments over the summer as international trade tensions intensified. The survey conducted on a sample of industrial and service firms indicated that investment will continue to expand overall in 2018, albeit less than planned at the beginning of the year.

The current account surplus remains high

Despite the slowdown in global trade, the current account surplus remained ample, having reached 2.8 per cent of GDP; Italy's net international debtor position continued to decline, falling to 3.4 per cent of GDP at the end of June.

Purchases of Italian portfolio securities by foreign investors in the early part of the year were followed by net sales between May and August, though with considerable fluctuations.

Unemployment falls and wage growth increases

The recovery in the labour market continued. Employ-ment rose considerably in the spring. Unemployment fell to 9.7 per cent in August, decreasing significantly for young people too. The growth in contractual wages, which had been showing signs of recovery since the end of 2017, strengthened in the private sector and in the economy as a whole, extending to actual wages as well.

Inflation returns to 2013 levels

Inflation rose to 1.7 per cent in the third quarter, the highest level since the beginning of 2013. A contributory factor to the upturn in prices was the increase in the prices of energy products; the growth in the core component remains modest. The surveys on Italian firms show that expectations of a rise in prices are gaining strength.

Tensions heighten on the government securities market …

The Italian financial markets have been affected by strong tensions as a result of investors' uncertainty about the economic policy stance. Government bond yields have increased, including those on shorter maturities. The sovereign risk premium grew, after having fluctuated considerably. The spread between Italian and German bonds was over 300 basis points in mid-October.

… also affecting private share and bond prices, especially those of banks

The earnings and capital conditions of banks have improved significantly since the beginning of the year. However, both share prices, up by over 10 per cent in the first four months of the year, and risk premiums on bank bonds have been affected by uncertainties on the Italian financial market. In mid-October, bank share prices, which had risen considerably in 2017, were down compared with the first half of the year; the premiums on credit default swaps of the largest banks were 40 basis points higher than at the end of June (and about 110 basis points more than at the end of March). The average interest rate on new loans to firms also rose slightly, although it was still very low by historical standards.

Non-performing loans continue to diminish

Credit quality has improved steadily: net of loan loss provisions, the ratio of non-performing loans to total outstanding loans fell further to 4.7 per cent in the second quarter. Loans to households and firms grew moderately, buoyed by a small growth in demand.

The Government confirms the reduction of net borrowing for this year …

In the Update to the 2018 Economic and Financial Document, the Government estimates a reduction in the net borrowing to 1.8 per cent of GDP for the current year, from 2.4 per cent in 2017; the weight of the debt is expected to decrease slightly, to 130.9 per cent from 131.2 per cent.^[1]

… and is planning an expansionary fiscal policy for 2019

The net borrowing target in 2019 is set at 2.4 per cent of GDP, against 1.2 per cent in the current legislation scenario. In the following two years, the planned deficit will decrease and in 2021 it will reach the same level expected for the current year (1.8 per cent of GDP), partly owing to the rise in VAT linked to the partial activation of the 'safeguard clauses'. In the Update, the Government also announced its intention to replace these clauses with measures to lower expenditure and boost tax collection.

According to the Government's programmes, over the next three years the reduction in the debt-to-GDP ratio will average 1.4 percentage points per year, compared with the 2.1 points envisaged in the current legislation scenario.

Based on the Update's assessment, this budget package would significantly boost the economy. The real extent of the effects will depend on the design, timing and implementation of the measures. The effectiveness of the budgetary policies in supporting the economy will also rely on the preservation of saver and investor confidence in the attainment of balanced public finances.