World economic growth slows - World economic growth slowed in the second and third quarters, with a slackening of activity in the advanced and the emerging countries alike; world trade lost vigour. Growth expectations are weighed down by uncertainty over US budgetary policy, the performance of demand in the emerging countries and the sovereign debt crisis in the euro area. The main central banks have stepped up their expansive policy action.
In the euro area cyclical conditions weaken even in the strongest economies - The disparities in growth rates between different euro-area countries persist, but the slowdown has now spread even to the most robust economies. According to the €-coin coincident indicator, which estimates growth net of the most erratic components, economic activity remained weak in the summer months. Inflation has been fuelled by higher energy prices and by tax measures in some countries but should subside in the coming months.
The ECB acts to safeguard monetary policy transmission - In early August the Governing Council of the EC B reaffirmed the need to address the serious distortions of the bond markets, which are reflected in differences in monetary conditions between countries. It stressed that premiums related to fears of euro reversibility must be countered resolutely. At the start of September the Council announced the modalities for undertaking new outright purchases of government securities on the secondary market. These purchases will be subject to strict conditionality and will be focused on bonds with residual maturities of between one and three years; no temporal or quantitative limits have been set.
Financial tensions ease - The announcements made have attenuated the tensions on sovereign debt markets within the area, which had worsened again during the summer. Risk premiums declined everywhere, especially in the countries most exposed to the debt crisis, but financial market conditions nonetheless remain fragile.
The financial market climate improves but remains uncertain - The financial markets are being affected not only by the weakness of economic activity but also by uncertainty about the timing and method of possible requests for assistance by troubled euroarea countries, the conditions that will be attached to such assistance, and the state of some National banking systems. Social tensions could complicate the implementation of adjustment measures. It is essential to proceed resolutely and at all levels towards budgetary balance and the necessary structural reforms, as well as with the reform of the European institutional architecture. The creation of a European Banking Union must aim to sever the link between sovereign debt conditions and the state of national banking systems.
Italian economic activity slows down during the summer, with slightly less gloomy signs in September - Economic activity in Italy declined by 0.8 per cent in the second quarter, as in the first, and continued to contract in the summer months, though less sharply. The weakness of consumption and investment demand reflects still tense financial conditions, the effects of budget measures on disposable income, and the weak confidence of households and firms. Business surveys in September showed signs of a slight lifting of pessimism over the short-term outlook, but not enough to presage an immediate return to growth.
Exports to non-EU countries continue to buoy production - The performance of exports has been relatively good and made a positive, albeit limited, contribution to economic activity. The recovery in merchandise exports in the second quarter mainly involved markets outside the European Union; recent surveys indicate that exports are holding up. The deficit on the current account of the balance of payments has declined significantly, thanks in part to the fall in imports caused by the contraction in domestic demand.
The employment picture is still negative - Employment remained practically stable in the second quarter, but the increase in the labour force - concentrated among younger age groups, women and in the southern regions - drove the unemployment rate above 10 per cent. Gross earnings shrank in real terms. The most recent data and business surveys indicate that the employment outlook is still negative.
Inflation is expected to diminish in the final part of the year - The inflation rate stayed above 3 per cent in the third quarter, reflecting the rise in energy prices and the effects of the indirect tax increases decided in 2011; estimated at nearly 1 percentage point, these effects should run their course in the coming months. Price pressures are likely to subside, reflecting the weakness of demand. The differential vis-à-vis euro-area average inflation declined to 0.7 percentage points in September, nearly half of it ascribable to the effects of taxation.
The improvement in financial markets extends to Italy ... - Net portfolio disposals of Italian securities by foreign investors ceased in the three months to July. Yields on government securities came down for all maturities in the third quarter; the decline gathered pace in September. The reduction also spread to the yields on bank and corporate bonds and was accompanied by an equity rally. Some Italian banks resumed bond issuance on foreign markets.
... and is reflected in credit conditions - The conditions of bank lending have benedite from the July reduction in official rates and, in the last few weeks, from the decline in sovereign spreads. Interest rates on loans to households and firms decreased in August; the standards for approving loans have become more favourable than the highly restrictive ones prevailing at the beginning of the year. Lingering tensions indicate that monetary policy transmission is still uneven; the cost of credit remains higher than the euro-area average.
Banks' retail funding remains solid; capital ratios improve - Italian banks' retail funding remains solid, but problems persist on the wholesale market. Credit quality and bank profitability have been hit by the deterioration in cyclical conditions, but the banks' capital base has strengthened further.
The public finances are set to improve in the next three years, despite the poor cyclical conditions - In September the Government updated its forecasts for the public finances. Net borrowing is expected to decline significantly both this year and the next, despite the weakening of the economy. In accordance with Italy's European undertakings, in 2012 the budget deficit should be below 3 per cent of GDP; for 2013, a start on lowering the ratio of debt to GDP is planned, and the structural budget is expected to be in balance (compared with a surplus of 0.2 per cent on a current legislation basis). In October the Government drafted the Stability Bill, setting out the measures to achieve the new planning objectives. The planned increase in VAT is to be scaled back and the income tax rates for the two lowest brackets reduced. Revenue increases are expected from the revision of tax deductions and credits and from measures on banking and insurance.
Implementation of the structural reforms remains a priority - Although the Government and the leading analysts expect Italian GDP to contract on average in 2013, their forecasts are consistent with the economy pulling out of recession during the year. A faster return to growth would be fostered by an improvement in credit conditions and in confidence. As part of the broad reform process under way to set Italy back on a high growth path, additional measures have been adopted in the last few weeks to improve the efficiency of the public administration and foster the development of innovative companies. Prompt and determined action to implement the measures adopted is crucial.
