Economic Bulletin No. 48 - 2008

The world outlook worsens - International financial market strains have become more acute in the first part of 2008 and the world economic picture has worsened. In the United States economic activity has slowed sharply, as the effects of the housing market slump are compounded by those of more restrictive financial conditions for households and firms. The unflagging growth of the emerging economies continues to sustain the rapid expansion of world trade. The prices of energy and food commodities have recorded further substantial rises, fuelling inflation in the importing countries, influencing monetary policy stances and weighing on disposable incomes and consumption.

Growth slows and inflation picks up in the main euro-area countries ...- The European Central Bank forecasts released in March put the central estimate of euro-area GDP growth in 2008 at 1.7 per cent, lower than in December; and the latest IMF forecast pares that figure to 1.4 per cent. The €-coin indicator for the area suggests a possible pause in the deceleration in March, but the international picture remains unfavourable and highly uncertain. Consumer price inflation in the area has been gradually accelerating since the autumn, and it reached 3.5 per cent in March according to provisional estimates. In this context the ECB has kept its official rates unchanged at 4 per cent while working in concert with the other principal central banks to supply adequate liquidity to the financial system.

...including Italy - For Italy, a series of qualitative and quantitative indicators suggest that the phase of cyclical slackening that began in the fourth quarter will continue in 2008, holding output growth below the economy's potential, which is already low by international standards. The economy continues to suffer from the structural problems that have prevented satisfactory productivity increases for a number of years now, regardless of cyclical fluctuations. It is estimated that inflation reached a twelve-month rate of 3.6 per cent in March, with an increase since August in line with that of the euro area as a whole.

Household consumption and borrowing slow down - Italian household consumption expanded by 1.4 per cent in 2007, sustained by an analogous increase in disposable income after two years of stagnation. More than half the income gain stemmed from the expansion of employment, while gross per capita earnings remained unchanged in real terms. However, the second half of the year saw a deterioration both in the labour market (employment declined in the fourth quarter) and in consumption, and the subsequent trends in retail sales and consumer confidence suggest that this pattern has continued in recent months as well.
It is estimated that the major labour contract renewals concluded in late 2007 and early 2008 should result in an acceleration of de facto per capita earnings this year. In 2009 earnings growth is expected to return to the moderate levels of recent years. Households have continued to increase their debt, but at a slower pace. The cost of debt service has increased to about 8 per cent of disposable income. It is calculated that the quality of household credit remained unchanged in the second half of 2007.

Firms increase exports but not investment - Firms are slowing down their accumulation of material capital. Investment grew by just over 1 per cent in 2007, but that in machinery and equipment was flat. The broad stagnation of investment has apparently continued into 2008, as is suggested by businesses' assessments of the outlook for demand and capacity utilization. According to the new data series released by Istat, Italian exports expanded by 5 per cent last year, confirming the signs of the recovery in industrial export capability that emerged in 2006; however, they grew by about 2 points less than world trade, in the presence of a similar deterioration in price competitiveness due to comparatively slow increases in productivity and the appreciation of the euro.
It is estimated that firms' operating profits declined in the last part of 2007. Corporate self- financing diminished, resulting in an increase in the borrowing requirement despite the stagnation of investment. Bank lending to firms continues to grow rapidly.

Italy's public accounts improved in 2007 - Italian general government net borrowing diminished by 1.5 percentage points in 2007 to 1.9 per cent of GDP, coming back down to the levels recorded in 1999 and 2000. This should allow the termination within the next few months of the excessive deficit procedure initiated against Italy in 2005. The primary surplus, which was practically eliminated that year, has been brought back up to 3.1 per cent of GDP. As in 2006 the improvement in the accounts stemmed essentially from the substantial increase in tax and social contribution revenue (to 43.3 per cent of GDP, just under the 1997 peak). Part of the increase reflects the transfer of the accruing severance pay entitlements of employees who did not elect to join supplementary pension funds to the social security administration, INPS. The incidence of primary current expenditure declined slightly to 39.6 per cent of GDP but remains near its highest level ever. Investment spending returned to growth, but at a slower rate than GDP, while interest payments increased from 4.6 to 5.0 per cent of GDP, largely reflecting the increase in interest rates over the last two years.
The public debt was reduced from 106.5 to 104.0 per cent of GDP, the same level as in 2004.
In March the Government revised its estimate of net borrowing for 2008 upwards, from 2.2 to 2.4 per cent of GDP. The cyclically adjusted deficit, net of the effects of temporary measures, is projected to deteriorate by 0.6 percentage points with respect to 2007. The planning framework confirms the objective of a balanced budget in 2011.

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