The world economy slows; oil prices fall - The world economy continued to expand at a moderate pace in the first quarter of 2012, held back by the stagnation of activity in Europe and the slowdown in the United States and the emerging economies. In the spring quarter economic activity faltered; uncertainty over the evolution of the sovereign debt crisis in the euro area and fiscal policy in the United States continues to weigh on the prospects of recovery. Oil and other commodity prices fell sharply, reflecting the cyclical weakness of the world economy. Inflation diminished practically everywhere.
Sovereign debt market tensions flare up again from April - The tensions on the financial markets of the euro area, which had eased in the early months of the year, flared up again starting in April. The increase in risk aversion continued to push down the yields on securities issued by the reputedly soundest countries. Investors' concerns about the political situation in Greece and the implications of the difficulties experienced by the Spanish banking system were compounded by a perceived lack of cohesion among governments in shaping the reform of European governance and upgrading the crisis management mechanisms in the euro area.
The Euro Summit takes major decisions, which must be implemented - The summit of the heads of state or government of the euro-area countries and the European Council of 28 and 29 June took important decisions directed to breaking the vicious circle between sovereign debt crises, the fragility of banking systems and growth. The European Commission will present a set of proposals for an integrated system of European banking supervision. Financial assistance to the Spanish banking system will be provided initially by the EFSF and then taken over by the ESM, which will not enjoy privileged creditor status. The summit reaffirmed the commitment to safeguarding financial stability through efficient use of the instruments available to stabilize the financial markets of the countries that are abiding by their European commitments. Swift implementation of these decisions is essential.
Growth in the euro area comes to a halt; inflation is diminishing - Euro-area GDP stagnated in the first quarter of the year, with cyclical conditions continuing to differ significantly from country to country. The €-coin indicator calculated by the Bank of Italy, which estimates growth net of the most erratic components, was slightly negative in June, while consumer price inflation declined further to 2.4 per cent.
The ECB lowers interest rates and vigorously supports liquidity - In view of the stagnation of credit, the fall in inflation and the uncertain outlook for growth, the ECB further reduced official interest rates, lowering that on main refinancing operations to 0.75 per cent and that on the deposit facility to zero. It has continued to supply abundant liquidity. Refinancing will be at fixed rates and with full allotment at least until the middle of next January. The range of securities eligible as collateral has been widened further in order to improve banks' access to refinancing, counter the segmentation of markets and sustain the flow of credit to households and firms.
In Italy output continues to decline in the second quarter - According to our estimates, in the second quarter GDP continued to contract, by slightly more than half a percentage point compared with the previous period. The decline reflected the fall in domestic consumption and investment demand; factors in this were the weakness of employment and real incomes, the fall in household confidence, and the only slight improvement in credit conditions. Foreign trade continued to sustain economic activity.
Core inflation remains subdued - In Italy consumer price inflation remained stable in June, at just above 3.0 per cent. The growth in prices continues to be affected by last autumn's increase in indirect taxes, which accounts for about a percentage point. Core inflation, net of the more erratic components, remains below 2 per cent. Our estimates indicate that consumer price inflation will be 1.8 per cent in 2013.
Italian banks further strengthen their capital - The three-year refinancing operations of the Euro-system have eliminated the risk of bank liquidity problems and of these triggering a systemic crisis. The tensions on the sovereign debt markets continue to affect Italian banks' wholesale funding, which is still diminishing. By contrast, their retail funding in the traditional forms from resident savers is expanding. The recession is affecting the quality of credit, but the Italian banking system's capital base has strengthened further.
The cost of credit falls but lending remains weak - The cost of loans to firms has gradually decreased since the beginning of the year. Surveys conducted in the spring point to an attenuation of the difficulties in accessing credit. The improvements remain tenuous, however; the amount of lending granted is still modest. The outlook for credit continues to reflect the persistent tensions on international financial markets and the difficult economic situation, which is affecting the demand of firms and households and the banks' assessments of their creditworthiness.
The outlook for growth is still conditioned by weak domestic demand - Compared with January's Economic Bulletin we have revised our projections for GDP growth downwards. In 2012 and 2013 economic activity is again likely to be characterized by a pronounced weakness of domestic demand. The main positive contribution to GDP growth is expected to come from exports. Investment will suffer from the persistent tightness of credit conditions and from the situation of the property market. Household consumption is likely to contract significantly, reflecting the effects on disposable income of the public finance adjustment measures adopted last year and the uncertain outlook for employment. The external current account is expected to improve, moving towards balance.
The recession should end next year - Overall, the recession is expected to continue in the second part of the year, but to be milder than in the first two quarters; it should end at the beginning of next year. The growth in output is likely to remain barely positive in 2013 but afterwards to gain strength. Assuming a yield spread between the ten-year BTP and the German Bund of around 450 basis points, GDP is projected to contract by an annual average of 2.0 per cent in 2012 and 0.2 per cent in 2013.
Employment declines this year - Employment is expected to fall by slightly more than 1 per cent this year and to stabilize in 2013. In a context of significant expansion of the labour force, already observed in the first part of this year, the unemployment rate is expected to exceed 11 per cent in 2013.
The pace of the recovery will depend on the cohesion shown by the EU and on the return to normal conditions in the financial markets - The uncertainty surrounding this scenario is con-siderable. The medium-term prospects of the Italian economy are closely related to the evolution of the sovereign debt crisis and its effects on credit, the confidence of households and firms, and the demand coming from our European partners. The ways in which the decisions of the Euro Summit of 28 and 29 June are implemented will be crucial for easing financial market tensions and restoring normal credit conditions, which would hasten recovery in Italy and the rest of the euro area. On 13 July Moody's, despite recognizing the strengths of the Italian economy and the progress made with structural reforms, downgraded Italy's sovereign debt. The decision, announced just before an auction of Italian government securities, did not have significant effects either on demand or on yields.
The structural reform measures adopted so far can improve the outlook for growth - The measures to review and reduce expenditure recently adopted by the Government are designed to avoid the depressive effect on consumption of the increase in VAT rates originally scheduled for September while keeping the level of services unchanged thanks to efficiency gains. Looking ahead, the spending review, together with the action to counter tax evasion, may allow a reduction in tax rates, especially on labour, thus assisting the recovery. The interventions to accelerate the payment of general government's trade payables should alleviate creditor firms' liquidity problems and provide support for demand. Taken together, the legislation adopted in the last few months for liberalization, economic stimulus and labour market reform has made structural changes that will have a positive impact on our economy's ability to grow, above all in the medium term.
