The world economy continues to expand - The prospects of global economic growth appear firmer and more broadly based than three months ago (see Economic Bulletin, October 2010). Robust expansion continues in the emerging economies and, among the advanced economies, in Germany; assessments of growth in the United States have improved. After vigorous growth in 2010 boosted it back to its pre-recession levels, the volume of world trade is expanding at a slower but nonetheless historically rapid pace this year. External current account imbalances began widening again in the first nine months of 2010, although the merchandise trade balance of the United States has recently narrowed. At the G20 summit in Seoul in November, the Heads of State and Government approved an action plan based on economic policy coordination in pursuit of more balanced growth at global level.
Higher raw material prices show up in higher consumer prices - In the advanced countries, consumer price inflation since the autumn reflects the increase in raw material prices, driven up mainly by expanding demand in the emerging economies; it is restrained by the ample margins of unused capacity, so that, net of energy products, the variations in prices are still modest; monetary policies remain expansionary. In the emerging countries, where the inflationary pressure is greater, the authorities are tending to make monetary conditions less accommodating.
The sovereign debt of some euro-area countries is under renewed strain - In the last few months of 2010 the yields on the long-term government securities of the major advanced economies rose gradually. After abating temporarily in October, the tensions on the sovereign debt of some euro-area countries grew more acute from the beginning of November, owing in part to fears of contagion sparked by the severe problems of the Irish banking system. The spreads between the yields on the ten-year government bonds of Greece, Ireland, Spain and Portugal and those of Germany widened sharply; a more moderate increase was recorded in Italy and Belgium. In the second week of January the pressures moderated. From November onwards the Eurosystem increased its purchases of public bonds under the Securities Markets Programme. At the end of that month, the finance ministers of the EU countries approved a plan of financial support for Ireland at the request of the Irish Government. At the same time, the ministers of the Eurogroup agreed on the main features of the European Stability Mechanism as a permanent safeguard for the euro area's financial stability.
Growth continues in the euro area ... Euro-area GDP grew by 0.3 per cent in the third quarter of 2010 compared with the previous period, after an increase of 1.0 per cent in the second. The expansion appears to have continued in the fourth quarter. From October the Bank of Italy's €-coin indicator turned upwards, showing quarterly growth in euro-area GDP of between 0.4 and 0.5 per cent. Output growth in Germany appears to be continuing well above the euro-area average. According to the professional analysts polled by Consensus Economics, the area's GDP grew by 1.7 per cent in 2010 and will expand a little less than that this year, in line with the Eurosystem's recent projections. Consumer price inflation rose to just above 2 per cent in December, essentially owing to the pick-up in energy prices; indirect tax increases in the second half of the year in some countries of the area were also a factor. The indicators of medium- and long-term inflation expectations remain consistent with the Eurosystem's objective of price stability.
... and in Italy - Italian GDP growth slowed in the third quarter to 0.3 per cent with respect to the second, the same as in the euro area overall. The main impetus to economic activity continued to come from exports, while the already modest contribution of domestic demand diminished in connection with the slowdown in investment in machinery and equipment following the termination of tax incentives. Economic activity, specifically industrial production, appears to have weakened in the fourth quarter. Households' spending continues to be governed by caution, in view of the weakness of disposable income and the uncertain outlook for the labour market.
Employment is not yet recovering - Employment contracted again in the third quarter, if only marginally. Confirming the pattern seen since the onset of the crisis, the fall was sharpest among young people. With the return to pre-recession levels of output expected to be slow, firms prefer more flexible forms of employment to permanent full-time contracts.
The government borrowing requirement diminished significantly in 2010 - The state sector borrowing requirement declined by nearly 1.5 percentage points of GDP last year. Based on the data available, net borrowing should be below the target of 5 per cent. The improvement may be ascribed mainly to a contraction in capital expenditure. Revenue, after falling in 2009, is expected to rise again in 2010 thanks also to the introduction in January of new restrictions on VAT offsets. The public debt should rise to about 119 per cent of GDP, from 116.0 per cent at the end of 2009. This is smaller than the European Commission's estimate of the rise for the euro-area countries as a group, and in part it reflects the increase (equal to 0.7 percentage points of GDP) in the Treasury's liquid balance with the Bank of Italy. For the three years 2011-13 the Public Finance Decision calls for a further, gradual improvement in net borrowing, as the result of the three-year budget approved at the end of May. The Stability Law enacted in December does not alter the Decision's plans for reducing net borrowing.
Italian growth will remain moderate in 2011-12 - Our latest estimates - based on the same assumptions concerning world demand growth that underlay the Eurosystem's December projections for euro-area growth - are for Italian gross domestic product to maintain last year's low rate of growth in both 2011 and 2012, about 1 per cent. Held back by the slackness of domestic demand, Italian GDP expansion would thus be slower than that of the euro area, which consensus estimates put at 1.5 per cent. In this scenario no buoyant recovery in employment can be expected. Consumer price inflation should be about 2 per cent in 2011-12.
There are both upside and downside forecasting risks - Considerable uncertainty surrounds this forecasting framework. On the downside, renewed fears for the sustainability of some euro-area countries' sovereign debt could result in higher costs of finance for the private economy as well. On the upside, the growth of world demand could prove to be stronger than assumed here, even though since our July forecast it has been revised upwards by more than one percentage point to 7 per cent. It is essential to remove the structural obstacles that have prevented the Italian economy, so far, from participating fully in the world economic upswing.
