The world recovery is proceeding - The economic recovery, under way since the summer in the major advanced economies and rapidly gaining strength in the emerging economies, proceeded in the final part of the year, boosted by the expansionary policies of the main countries. In the third quarter GDP began to grow again in the United States and the euro area, continued to expand in Japan and gained pace in the emerging economies of Asia and Latin America. The volume of world trade also began to grow again, although it remained about 10 per cent below the level of a year earlier. In the fourth quarter industrial production continued to recover from the lows registered in the first half of the year and the climate of confidence improved further; in the United States and Japan the employment decline slowed. The strains in the international financial markets eased and the tightening of lending conditions was moderated. Although the prices of oil and other raw materials are gradually moving back up, inflation remains moderate in a context of ample unutilized resources.
The markets expect the central banks to keep official rates at their present low levels for some time yet. Low rates and the abundance of liquidity have encouraged demand for risky assets. A worsening of the economic situation or expectations that interest rate hikes might come sooner could generate corrections in the market value of financial assets.
... at an uneven pace - The forecasts for 2010 of private analysts and the main international organizations have been revised upwards. According to the OECD's most recent forecasts, the advanced economies as a group will grow by about 2 per cent, a relatively moderate pace by comparison with the initial phases of previous cyclical expansions. By contrast, growth is expected to continue at high rates in China, India and Brazil, fuelled by more robust domestic demand.
The expansion is struggling to gain traction in the advanced economies ... Some factors of weakness could condition the recovery in the advanced economies. The expansionary effect of the fiscal stimulus measures is likely to fade in the second half of the year, and the positive contribution from the expected rebuilding of inventories will necessarily be temporary. The possibility of fresh impetus for the recovery coming from consumption is burdened by uncertainty over the state of the labour market; unemployment rates are expected to rise further or at least to remain high for much of 2010. In some countries, including the United States, the desire of households to repair their finances is a factor curbing their propensity to spend. The low capacity utilization rate tends to hold down investment in capital goods, while the excess supply of homes and buildings tends to discourage investment in construction in the countries where the property market has fallen most sharply.
... including the euro area - According to the cyclical indicators, the recovery also continued in the euro area in the last few months of 2009, but without gaining strength compared with the third quarter. The sharp improvement in the climate of confidence among firms and consumers has not yet been matched by an equally strong increase in production and business turnover. In the face of a relatively favourable performance of exports, this reflects the persistent weakness of domestic demand; the consumption component is affected by the fall in employment, which continued during the autumn. According to OECD forecasts, basically in line with those of the Eurosystem experts, euro-area GDP growth will be slightly under 1 per cent in 2010. Consumer price inflation, which stood at about 1 per cent towards the end of last year, is likely to increase slightly in 2010. The ECB has kept reference rates unchanged and begun gradually to remove the unconventional measures no longer deemed indispensable, nevertheless confirming the Eurosystem's pledge to supply all necessary liquidity to the banking system.
In Italy growth is continuing at a modest pace ... In Italy GDP, which returned to growth in the third quarter (0.6 per cent on the previous quarter) after five consecutive quarters of contraction, is estimated to have continued to expand in the final part of 2009, albeit at a slower pace. Despite the continual improvement in the climate of confidence, firms are still reluctant to increase production in light of the uncertain pick-up in orders. The partial recovery of industrial activity registered in the third quarter, from the very low levels to which it had fallen in the second, did not continue in the autumn.
... led by the moderate expansion of foreign demand ... The recovery in exports that began during the summer also weakened in October and November, according to the data available. However, foreign sales are expected to accelerate gradually during this year to an average rate of close to 3 per cent, still about one percentage point lower than the forecast growth in world trade. In recent years Italian goods' loss of price competitiveness has reflected both the appreciation of the euro and a larger increase in unit labour costs than in competitor countries, due mainly to the stagnation of productivity.
... while domestic demand remains weak - The growth of consumption and private-sector investment, despite an upturn in the third quarter of 2009, remains weak. Consumer spending has been dampened by the state of the labour market. The fall in employment has reduced households' disposable income, while uncertainty over the outlook is curbing their propensity to consume. The unemployment rate rose to 8.3 per cent in November, 2.4 points above the low of April 2007. However, for a comprehensive assessment of the degree of utilization of the available labour force we should add to the unemployed proper also workers on Wage Supplementation benefits and discouraged workers, i.e. those who are not actively looking for work and are thus not officially defined as unemployed but who actually have about the same chance of finding a job as those who are. We estimate that by this broad definition, the unutilized portion of the labour force was above 10 per cent in the second quarter of 2009, nearly 3 percentage points over the formal unemployment rate. Given ample idle capacity, firms' investment in capital goods too can be expected to be modest.
The recovery will still be sluggish in 2010 and 2011 ... The domestic components of demand are likely to make only a minor contribution to growth over the next two years. As has often been the case in comparable phases of the cycle in the recent past, the main support for the recovery will come from foreign demand, but in a context in which the world economy is struggling to get back on a path of rapid growth. Overall, we estimate that the Italian economy should expand by 0.7 per cent this year and accelerate to 1 per cent in 2011.
... with low if gradually rising inflation - Consumer price inflation, practically nil last summer, went back up during the autumn to a twelve-month rate of 1 per cent in December. Core inflation - excluding energy and food products - has stabilized at just under 1.5 per cent. Our forecast is for the rate of consumer price inflation to rise gradually to 1.5 per cent in 2010 and 1.9 per cent in 2011, partly in response to the upward trend in energy prices.
The forecast is still surrounded by considerable uncertainty - This forecasting scenario is nevertheless subject to quite considerable uncertainty. The margin for error is connected on the one hand with world demand, which could turn out to be more robust than assumed, and on the other with the risk that labour market conditions may remain weak longer than expected. The GDP growth forecast of less than 1 per cent for 2010 as a whole is the central value in a broad range, with a 70 per cent probability that the GDP outturn will fall within a confidence interval of ±1 percentage point.
The public finances have worsened, although less than the euro-area average - General government net borrowing is estimated to have exceeded 5 per cent of GDP in 2009, compared with 2.7 per cent in 2008. The widening of the deficit is significantly less marked than that expected for the euro area as a whole. The ratio of the public debt to GDP should increase by about 10 percentage points. The effect of the economic downturn on the deficit has been attenuated by the fall in interest expenditure. The measures to mitigate the social repercussions of the crisis and to support demand, valued at a total of about 1 percentage point of GDP, were financed by reductions in appropriations made earlier and by the introduction of one-off substitute taxes.
The Finance Law for 2010 envisages, in addition to the extension of measures already in place, some increases in current expenditure. In this case again, an important part of the financing is to come from reductions in previous appropriations and from extraordinary revenue measures, which should have only a limited effect on economic activity. The reference here is primarily to the foreign assets disclosure scheme (the "tax shield"), whose effects on the deficit have mostly been shifted to the current year by the reduction in the size of the advance personal income tax payment due at the end of 2009. Overall, the Finance Law leaves the budget balance unchanged, with a net increase of 0.2 percentage points of GDP in both revenue and expenditure.
