The global recession has halted ... The global recession has halted and a recovery is shaping up, thanks largely to the expansionary economic policies of the leading economies. GDP had already begun to grow again in the second quarter in many of the industrial and emerging economies where it had fallen steeply. In China and in India it had accelerated. In the United States and in several European countries it had continued to contract, but at a much more moderate pace. In the third quarter favourable signs came from the increases in industrial production and retail sales and the improvement in business and consumer confidence in many countries. Conditions on the international financial markets continued to improve, buoyed by strengthening investor sentiment. Rapidly rising share prices, narrowing yield spreads on corporate bonds and the easing of conditions on the interbank markets were all confirmed.
... but the recovery is likely to be slow and not free from risk - According to the forecasts of international organizations, however, the recovery will proceed at a modest pace until next year: in 2010 world growth is expected to average 3 per cent, that of the advanced countries to be just over 1 per cent. Moreover, there is considerable uncertainty over how solid the recovery will prove: there is the risk that when fiscal and monetary stimulus measures lapse and the cycle of inventory building has run its course, private demand could stagnate again, curtailed in many economies by high and rising unemployment, the limited availability of credit, and households' need to put their finances in order.
The euro-area economy appears to have returned to growth in the third quarter - In September, the Bank of Italy's €-coin coincident indicator of the euro-area business cycle was positive, though just barely, for the first time in fifteen months. The indicators of business and household confidence improved further; the Purchasing Managers' Index rose back above the threshold compatible with an expansion of output in the service sector and closely approached it in industry. Industrial production continued to rise in August. According to the professional forecasters surveyed by Consensus Economics, euro-area GDP returned to growth in the third quarter, with an increase in the order of half a point. The latest forecasts released by leading international organizations point to a contraction of economic activity of around 4 per cent in 2009 followed, according to the International Monetary Fund, by an expansion of a few tenths of a point in 2010. The twelve-month rate of consumer price inflation continued to fall and turned negative in the third quarter, reflecting the statistical comparison with a year earlier, when the price level had been kept high by international commodity prices. The forecasters surveyed by Consensus Economics expect euro-area inflation to average 0.3 per cent in 2009 and 1.3 per cent in 2010, with a return to positive twelve-month rates already in the final months of this year and a gradual increase in the course of 2010. The Governing Council of the European Central Bank has held its main refinancing rate at 1 per cent since May and continues to ensure abundant liquidity.
Recovery in the third quarter is estimated for Italy too ... - It is estimated that in the third quarter Italian GDP also returned to growth after five consecutive quarters of contraction, which had brought production down to levels last seen almost a decade ago. The increase can be estimated at about 1 per cent compared with the second quarter. This appears to be largely due to the sharp increase in industrial production (a result that should be treated with caution given the great volatility of seasonal factors in the summer months), which finally turned upward after plummeting between the second quarter of 2008 and the second quarter of 2009. It is likely that part of this recovery is due to the replenishment of inventories, which had fallen to extremely low levels in some sectors.
... but there is still no sign of an upturn in domestic demand ... The improvement in household and, to a lesser degree, business confidence gathered strength, especially as regards future conditions. However, there was a further worsening in intentions to purchase durable goods and in evaluations of the state of the labour market. Firms' propensity to invest remains very low, with historically high levels of unutilized capacity. It is likely that households' spending decisions are held back by the drop in employment under way since mid-2008. In the second quarter there were job losses of more than half a million compared with a year earlier, not counting the effect of the rising number of immigrant workers included in civic registers. About 300,000 people commonly termed "precarious workers" lost their jobs, most of them young. In the third quarter there was still greater resort to the Wage Supplementation Fund: the total number of hours authorized rose by about 30 per cent compared with the preceding quarter.
... or in foreign demand - Although global demand conditions have improved, the data available for Italian exports for July and August indicate persistent weakness. Italian industrial firms continued to lose price competitiveness in the first eight months of the year, due to the very poor performance of labour productivity: measured by the number of hours worked (to take account of the ample resort to the Wage Supplementation Fund), productivity fell by 3.6 per cent in the first half after declining by an average of 0.8 per cent in 2008; this affected unit labour costs, which grew by 5.4 per cent even though the hourly cost of labour rose very modestly.
Credit growth continues to slow - Bank lending to the nonfinancial private sector continued to reflect slack demand for credit by firms owing to the cyclical downturn in the economy and supply conditions that remained restrictive despite signs of an easing. In August lending rose by 2.2 per cent compared with August 2008, when the year-on-year expansion had been much faster, at around 10 per cent. The seasonally adjusted three-month rise was practically nil as lending to non-financial firms contracted and that to households increased only slightly. The quality of banks' assets and their profitability continued to deteriorate; fund-raising slowed further. The capital ratios of the leading Italian banking groups improved.
Inflation is rising moderately - After falling rapidly since the end of 2008, the twelvemonth rate of consumer price inflation reached a low in July of -0.1 per cent according to the HICP, reflecting the statistical effect of the comparison with the particularly high figure for July 2008; since then it has risen slightly to stand at 0.3 per cent in September according to preliminary data. The increase, also observable in core inflation, is expected to continue to the end of the year and gradually gather pace in 2010, in line with projections for the whole of the euro area. The professional forecasters surveyed by Consensus Economics predict inflation will remain moderate, averaging 1.5 per cent for 2010.
The public finances are deteriorating rapidly - The public finances are worsening significantly, owing mainly to the particularly negative trend in revenue. In the first nine months of 2009 tax revenue on a cash basis declined by 3.2 per cent, despite the steep rise of the receipts of some one-off substitute taxes. September's Forecasting and Planning Report basically confirmed the projections set out in the Economic and Financial Planning Document of July. This year net borrowing is expected to be almost double the figure for 2008, amounting to 5.3 per cent of GDP, and the debt ratio is forecast to rise by more than nine percentage points to 115.1 per cent. The European Commission has opened an excessive deficit procedure against Italy; all the euro-area countries are subject to this procedure at present, with the exception of Finland, Cyprus and Luxembourg. The outlook for the public finances is still burdened by the great uncertainty regarding the timing and strength of the economic recovery. The 2010 Finance Bill provides for measures on a limited scale that have no impact on the budget balances. The target for net borrowing is set at 5 per cent of GDP, the same as the current-legislation projection; under current legislation this envisages an increase in tax revenue, a marked slowdown in primary current expenditure, and a sharp cutback in public investment. Adjustment measures to consolidate the public finances are planned from 2011, once the adverse cyclical phase is past. In the Government's planning scenario, the deficit should be brought back below the 3 per cent threshold in 2012; the public debt ratio, projected to decrease starting in 2011, is expected to remain over 112 per cent of GDP in 2013, more than 9 percentage points higher than in 2007.
