Economic Bulletin No. 53 - 2009

The global recession is slowing but the timing and strength of the recovery remain uncertain - The global recession is easing. The need to rebuild stocks is providing an initial spur to production. Opinion surveys have shown signs of diminished pessimism. The decline in GDP and in world trade had deepened in the first quarter of 2009, but industrial output and other coincident indicators point to an abatement in the pace of the fall in the second quarter. Economic activity and trade flows in the Asian economies have shown particular improvement. The International Monetary Fund estimates that the contraction in global economic activity could stay within 1.5 per cent on average this year, still the worst result since the Second World War. Global GDP is predicted to return to growth of 2.5 per cent in 2010. These are encouraging signs, but the timing and strength of the recovery are uncertain. In particular, the risk remains that the adverse effects of the recession on the labour market could still have significant repercussions for final domestic demand.

Economic policies should help the recovery - Economic policies, whose full effects will unfold in the next few months, should help the recovery. The main countries took steps to guarantee the liquidity of the financial system, reinforce banks' stability, support demand and sustain employment. The recent G8 Summit in L'Aquila pledged to keep these measures in place for as long as necessary, but also, once the recovery has gained strength, to prepare appropriate exit strategies from the extraordinary economic policies adopted.

The strains in banking and financial markets abate but do not cease - The strains in money and financial markets have eased, thanks to a partial recovery of confidence and the plentiful liquidity supplied by central banks. An adequate supply of loans will be essential once the demand for financing for new productive investment revives. The signals coming from the credit markets are not unequivocal. After a phase of improvement, since the end of May the premiums on credit default swaps for the main international banks have been increasing again and some banks have undergone credit rating downgrades. The supply of credit is still conditioned by the amount of banks' capital. It remains important to make the quality of the assets in their balance sheets more transparent so as to reactivate the private channels of bank recapitalization.

Signs of an easing of the recession are also seen in the euro area ... - In the euro area, business and consumer confidence improved further in June. The same month saw the Bank of Italy's €-coin coincident indicator of the euro-area business cycle score its fourth successive increase, although it remained deep in negative territory. In May industrial production showed a first increase, buoyed mainly by the improvement in the automobile sector in Germany and France. According to our estimates, industrial production continued to contract over the second quarter of 2009 as a whole, but more moderately than in the two previous quarters: in the first quarter of 2009 the euro area had recorded an especially sharp fall in industrial activity, the fourth consecutive one and particularly severe in Germany; in France the growth in consumption, though modest, tempered the fall in production. Unemployment is rising in all the main countries. The Eurosystem forecasts released in June indicate a fall in area-wide GDP of between 4.1 and 5.1 per cent in 2009. Output growth is expected to be weak in 2010 as well, within a range of -1 to +0.4 per cent.

... and in Italy - In Italy, the decline in industrial production came to a halt in the spring: an uptick in April was followed by a basically flat result for May and, by our estimates, for June. Business and household opinion surveys also trace a picture of less pessimism in June. By contrast, the figures on the labour force and on the number of hours of wage supplementation authorized, updated respectively to March and June, show a worrisome deterioration in the labour market. Complete national accounts data are only available for the first quarter. They indicate persistent caution in Italian households' consumption plans, an effect of the uncertainty of employment prospects; they also signal a sharp contraction in investment, held down by the low rate of capacity utilization. We estimate that GDP diminished by 0.6 per cent on a quarterly basis in the second quarter after a decline of 2.6 per cent in the first. Even assuming no more than that output stays at its first-quarter level for the rest of the year, the average annual decline would approach 5 per cent. Taking all the currently available information into account, we estimate the fall in Italy's GDP in 2009 at 5.2 per cent. The large downward revision with respect to the forecast given in the Economic Bulletin in January (-2 per cent) is entirely due to the worsening of the global economic context delineated by the main international organizations, which we take as exogenous in our forecasting scenarios.

Recovery could get under way in 2010 - Benefiting from a world economic upturn that the main international organizations forecast as getting slowly under way within the next few months, economic activity in Italy should begin growing again in 2010. The Government's recent measures should help, in particular the temporary tax relief for investment in machinery and the increase in the funds allocated to settle general government trade payables with firms. Taking this into account, gross domestic product is expected to remain unchanged on average next year. In the fourth quarter it could be about half a percentage point higher than in the fourth quarter of 2009.

Inflation is likely to rise gradually from autumn onwards - Consumer price inflation is forecast to decline to a year-on-year rate of 0.8 per cent in 2009, reflecting above all the fall in raw material prices in the second half of 2008. It is expected to rise to 1.5 per cent in 2010.

The outlook remains highly uncertain - The uncertainty connected with the forecasting scenario for 2010, especially as regards the timing and strength of the economic recovery, is considerable. The zero growth forecast for GDP on average for the year is the mid-point of quite a wide range. The probability that the actual outturn will fall between ± 1.5 per cent is 70 per cent. The baseline scenario depends on the assumption that the credit market returns to normal functioning, which is essential to firms' ability to invest. If the recession's impact on the labour market were to be more severe than forecast, it would further curtail households' spending capacity and prompt additional precautionary saving. On the other hand, the signs of improvement in the world business cycle, halting as they are, could be the prelude to a somewhat sharper acceleration in the growth of world trade than is assumed in the present forecasts. As for price trends, the risk of deflation would appear to be small but not negligible.

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