The international context remains highly uncertain - World energy commodity prices have surged further in recent months. Compared with a year ago, the price of oil in dollars has doubled. New factors of fragility have emerged in the financial markets of the main advanced economies. In the United States, where the real-estate crisis shows no sign of abating, economic activity will remain weak for the entire year according to the forecasts of the international organizations.
In the euro area economic activity is slowing... - In the euro area, the strong growth in activity in the first quarter appears to have been temporary; cyclical indicators point to a sharp slowdown in the second quarter. According to the projections published by the Eurosystem at the beginning of June, growth will be positive but below its potential level. The recent forecasts of the OECD, leading private analysts and Consensus Economics concur with this assessment.
...and, as in most of the world, inflationary pressures are mounting - The increases in the prices of energy and food products are driving up inflation, which has risen appreciably in both the industrial and the emerging countries. In the euro area, inflation continued to increase in the second quarter of 2008, rising to 4 per cent in June, the highest level since the adoption of the single currency; it is expected to moderate, but only gradually, in the course of next year.
Against this background, in order to keep medium and long-term inflation expectations in line with the objective of price stability and prevent the increase in current inflation from affecting the setting of wages and prices, on 3 July the Governing Council of the ECB decided to raise the reference interest rates by 25 basis points.
On the following days the upward trend of the inflation expectations derived from the financial markets appears to have come to a halt.
In Italy consumption and investment are stagnating - The latest indicators signal a sharp deceleration in activity in the second quarter of 2008 in Italy as well. The relatively brisk growth in GDP in the preceding quarter came mainly from net exports. Consumption continues to be weighed down by the modest growth in households' real disposable income, compressed by the steep increases in the prices of energy and food products. The pessimism of firms, shown by business surveys, and the increase in financing costs have held down investment, above all in machinery, equipment and transport equipment.
Low productivity growth continues to affect competitiveness - Industrial activity began the year well but then weakened. It fell sharply in May and, according to the Bank's estimates, also in the second quarter as a whole. Price competitiveness continues to be adversely affected by a rate of productivity growth that remains below that of the other euro-area countries and by the effect - common to them - of the appreciation of the euro. Wages and salaries recorded a sharp acceleration between the final months of 2007 and the early months of 2008, due largely to one-off payments to cover periods of contractual hiatus. This resulted in a marked acceleration in unit labour costs.
Bank lending to firms continued to grow rapidly, although signs have emerged of a slowdown alongside that under way for some time in lending to households.
After the good result for 2007, employment scored a further slight gain in the first quarter of 2008. Compared with the same period of the previous year, the increase was most pronounced for women and for fixed-term and part-time jobs. The appreciable expansion in labour force participation in the first quarter was reflected in an increase in the unemployment rate on a seasonally adjusted basis to 6.5 per cent, from 6.2 per cent in the previous quarter.
Inflation rises to the highest levels since the mid-1990s - In the first six months of 2008 inflation also accelerated in Italy, driven by increases in the prices of food and energy inputs in world markets. The twelve-month rise in the harmonized index of consumer prices reached 4 per cent in June, the same as the euro-area average. The price increases have also involved some services that are particularly susceptible to movements in the prices of raw materials.
The Planning Document confirms the objective of a balanced budget by 2011 - The Economic and Planning Document for 2009-13 sets the new objective for net borrowing in 2008 at 2.5 per cent of GDP, compared with 1.9 per cent in 2007. It plans a reduction in the budget deficit to 2 per cent of GDP in 2009 and more vigorous adjustment efforts in the subsequent two years with the aim of achieving a balanced budget in 2011. Together with the Planning Document, the Government approved a decree law setting out almost all of the corrective measures necessary to achieve the objectives laid down in the Document for the period covered. The situation and outlook for the public finances were examined in the Testimony of the Governor of the Bank of Italy to Parliament on 2 July 2008.
According to the Bank's forecasts, economic activity will barely grow either this year or next - Since the publication of the preceding forecasts in the January issue of the Economic Bulletin the international context has deteriorated further. The consequence is a sharp downward revision of the projected growth of Italian GDP, which is now put at less than 0.5 per cent for both this year and next. The downward revision by comparison with the projection made in January (amounting to 0.6 percentage points for 2008) is attributable first and foremost to the effect of the increase in the prices of imported raw materials: by reducing households' spending capacity, it is dampening the growth in private consumption and causing firms to scale back their investment plans because of the poorer outlook for demand.
Domestic demand is expected to stagnate this year and to grow little in 2009, reflecting barely positive rates of change in consumption and investment. Braked by the loss of price competitiveness, exports are expected to slow down considerably but still to grow by about 2 per cent this year and a little less than that in 2009. The deceleration in imports is expected to be greater. Despite this overall favourable trade performance in volume terms, the expected pronounced deterioration in the terms of trade is likely to lead to a substantial increase in the deficit on the current account of the balance of payments.
Harmonized consumer price inflation is expected to rise to an average of 3.8 per cent this year and then to fall back towards 2 per cent in the course of 2009. The large upward revisions in relation to the estimates made in January (1.2 percentage points for this year and 0.8 points for 2009) mainly reflect the further increases in the price of oil. Domestic inflation, as measured by the GDP deflator, is expected to increase by much less (from 2.3 per cent in 2007 to 2.5 per cent this year and next): the impact of the acceleration in labour unit costs should be offset by a narrowing of margins in response to the weakness of economic activity and competitive pressures. These forecasts are subject to upside risks for inflation and downside risks for growth in connection with possible further increases in energy prices and a more unfavourable evolution of the international macroeconomic and financial picture.
