The financial crisis is affecting the real economy - The effects of the financial crisis on the real economy are proving highly virulent. The sharp reduction in wealth, the slowdown in lending and the deterioration in consumer and business confidence are holding back demand and output in the advanced economies, where there have been significant job losses. The consequences are serious for the emerging and developing economies, where the volume of international credit inflows is down by more than two thirds compared with 2007. The decline in international trade is affecting economic activity, with the risk of the banking system being weakened further. International organizations and the analysts consulted by Consensus Economics have been adjusting their forecasts downwards.
Some signs that pressures are easing should be verified - More recent data, whose importance and robustness will be assessed in the coming weeks, suggest that the fall in economic activity may be slowing in the United States, particularly as regards the real estate market and consumption. The effects of the extraordinary policy measures adopted to stimulate aggregate demand by almost every country will have to be examined.
The response from governments and monetary authorities has been intense ... - Governments and central banks have stepped up their efforts to keep liquidity abundant, contribute to strengthening the banking systems' capital base and foster the recovery of lending and aggregate demand. The cuts in official rates have been unprecedented both in size and in rapidity. The main central banks have launched unconventional monetary operations with the aim of increasing the supply of money, influencing long-term interest rates and guaranteeing well-functioning lending markets to the benefit of the economy. The size of central banks' balance sheets has increased considerably. Beginning in the second half of 2008, almost all countries have taken a decidedly expansionary fiscal policy stance, with measures to support demand on a scale also unprecedented since the Second World War. The estimates of international organizations point to a widening of the budget deficit by almost 4 percentage points of GDP in the advanced countries and by over 3 points in the emerging economies. The intensity of the discretionary measures varies from country to country, reflecting differences in the impact of the crisis, the magnitude of automatic stabilizers and the level of government debt. In the United States, measures have recently been announced to remove the troubled assets from banks' balance sheets.
... but banking systems continue to face difficulties - The difficulties of the international banking system have persisted in the first few months of 2009, even if it appears that interbank markets are gradually returning to partial normality. The problems have been reflected in share prices, whose fluctuations are primarily determined by uncertainty over developments in the financial sectors. Bond spreads remain wide. Strains also persist in the financial markets of the emerging economies.
At the end of 2008 the recession worsenedin the euro area - The economic situation in the euro area deteriorated sharply towards the end of 2008. The collapse of exports in the fourth quarter (-6.7 per cent compared with the previous quarter), together with that of investment, led to a fall in the rate of productive activity, with a further contraction expected at the beginning of this year. Household consumption also slowed, despite the sharp decline in inflation, probably dampened by uncertainty over employment prospects. The unemployment rate in the euro area has been rising, and accelerating, since the beginning of 2008. The european central Bank has continued the policy of cutting official rates begun last autumn, lowering its reference rates by 50 basis points in January and a further 75 basis points between March and April. The reduction in inflation has gradually spread to the core components, while the downward pressures of external origin have abated. Inflation expectations, while lower than those formulated at the end of 2008, do not envisage a generalized and lasting fall in prices.
GDP is falling sharply in Italy too - In Italy the contraction in GDP, under way since the spring of 2008, became more pronounced in the last quarter of 2008, with a fall of 1.9 per cent from the previous quarter, the largest since the 1974-75 recession. The slump in exports and investment contributed. The decline in employment that began in the third quarter of last year has continued, with an increase in the recourse made to the wage Supplementation Fund. On a seasonally adjusted basis, the number of unemployed has increased almost without interruption since the third quarter of 2007. The uncertainty over employment prospects has offset the positive effect on consumption of the fall in inflation. The cyclical indicators point to the continuation of the contraction in economic activity in the first quarter of this year, the fourth in succession. There are signs of a prospective easing of the force of the recession, for example in the recent survey of firms conducted by the Bank of Italy in cooperation with Il Sole 24 Ore, although not yet sufficient to presage an end to the fall in output.
Bank lending and funding are slowing - Bank lending is continuing to slow in response to demand factors and, in the case of lending to firms, of supply factors as well. loan quality is being influenced by the worsening of economic conditions. Funding is slowing. Starting last year the Government and Parliament have adopted measures to protect depositors, support banks' liquidity and capital and strengthen intermediaries' ability to satisfy the demand for credit.
The recession is worsening the public finances - The recession is worsening the public finances. In 2008 the deficit began to grow again, to 2.7 per cent of GDP. Total revenue slowed sharply; indirect tax receipts diminished. Primary current expenditure grew at a higher rate than the average of the two preceding years. The ratio of the public debt to GDP rose, returning to its level at the end of 2005. In February the Government estimated a further increase of one percentage point in the deficit for 2009, due to the worsening economic situation. A forecast update is expected in April. In the first three months of the year tax revenue on a cash basis diminished by 5.4 per cent compared with the same period of 2008. The size of the public debt limits the scope for discretionary measures to support aggregate demand. In February the Government strengthened them by introducing demand-side incentives, especially for durable goods, and tax reductions for firms. For the most part the measures are financed by reducing other expenditures.
