Cyclical conditions remain weak at global level ... The risks for the world economy have diminished following the accord reached in the United States to avert the fiscal cliff, the subsidence of financial tensions in the euro area and the improvement in the outlook in the emerging countries, but they have not vanished. Global economic activity remained slack in the second half of 2012, and the leading forecasters have trimmed their projections for the growth of world trade this year. They expect the expansion of world GDP to gain pace in 2014.
... and in the euro area ... Economic activity in the euro area continued to weaken in the last quarter of 2012. The consequences of the financial tensions that hit several euro-area countries during the year and the effects of the necessary fiscal consolidation measures have now also spread to what had been considered the more robust economies. The Eurosystem has lowered its growth projections for the current year significantly.
... but the tensionson financial markets are abating ... There was a sharp improvement in the state of the financial markets, whose deterioration had been an impediment to economic recovery in the area. Government securities yields came down in the countries that had suffered most from the tensions; capital began to flow again to some of the countries most severely affected by the sovereign debt crisis.The TARGET2 payment system balances, which reflect the disequilibria in private capital flows in the euro-area countries, showed signs of adjustment.
... as a consequence of monetary policy action, progress at European level and national measures - Contributions to these positive developments came from the effects of the ECB's announcement during the summer of Outright Monetary Transactions and, more recently, the decisions taken at European level. In particular, in November the Eurogroup renewed its support to Greece; the Greek government's buyback of bonds, which ended on 11 December, entails a reduction of about 10 percentage points in the debt-to-GDP ratio. In addition, the Council of Economic and Finance Ministers of the European Union countries reached an agreement on instituting a single supervisory mechanism for banks in order to break the vicious circle between sovereign debt and the state of the banking system. These advances were made possible by the credibility gained by national governments' policy action. However, market conditions remain uncertain; the commitment to move forward in adopting the measures necessary to guarantee the Union's cohesion must be confirmed.
The unevenness in monetary policy transmission is attenuated - The improvement of the sovereign debt markets had beneficial effects on monetary and financial conditions in the countries contending with the tensions, but divergences in bank lending rates persist, reflecting both the lags with which movements in government securities prices are transmitted to credit market conditions and the effect of the poor state of the economy on the creditworthiness of bank customers. In October the average cost of financing to households, firms and financial intermediaries was still about 110 basis points higher in Italy and Spain than in the countries spared by the crisis.
In Italy, the cyclical situation remains weak in the opening months of 2013 ... Domestic demand in Italy has yet to reach a turning point. According to the cyclical indicators, GDP growth was negative again in the fourth quarter of 2012 and is likely to remain weak in the current quarter. Modest signs of stabilization can be seen nevertheless; the prolonged deterioration in firms' opinions of the general economic outlook has come to a halt.
... while foreign trade continues to buoy economic activity - Foreign demand continues to provide support to economic activity. In recent months the expansion of exports has been sustained by sales to countries outside the EU. As a proportion of GDP, the deficit on the current account of the balance of payments came down by more than 2 percentage points between January and October compared with the same period of 2011 thanks to the improvement in the merchandise trade balance.
Employment is stable so far, but the number of job seekers and wage supplementation hours increase - The recession has not yet been reflected in a drop in employment. Rather, its effects have shown up mainly in greater recourse to wage supplementation and in an increase in the number of persons seeking work, which has driven up the unemployment rate, most notably among young people. In the third quarter of 2012 the youth unemployment rate was more than 6 percentage points higher than a year earlier.
Inflation declines - The gradual fall in consumer price inflation in the last few months (to 2.3 per cent in December) largely reflects the slackening pressure from oil prices and the fading impact of the indirect tax increases introduced in the autumn of 2011. The weakness of demand and lower cost pressures are likely to continue to moderate price inflation in 2013.
Credit conditions are still tight - The terms on which credit is offered benefited in the course of the year from the gradual removal of the liquidity constraints weighing on Italian banks, thanks largely to the policy measures taken by the Eurosystem. Lending nevertheless continues to be impeded by banks' perceptions of high credit risk in connection with the impact of the recession on companies' accounts. Non-performing loans have increased significantly.
Funding capacity and capital are strong - Positive signs have emerged, however. Retail funding is growing, liquidity conditions have improved, and some banks have resumed wholesale market issues. The core tier 1 ratio of the largest banking groups has risen further.
The improvement of the fiscal balances proceeds - The general government borrowing requirement, net of privatization receipts and the lending of the European Financial Stability Facility, can be estimated at 3 per cent of GDP in 2012, down from 3.9 per cent in 2011. Despite the cyclical weakness, the budgetary measures taken in the second half of 2011 will result in a further improvement in the balances this year and next. The debt-to-GDP ratio should begin to come down in 2014, thanks to further expansion of the primary surplus and the recovery in economic activity.
GDP contracts by an estimated 2 per cent in 2012 - In the macroeconomic scenario set out in this Bulletin, Italy's GDP is estimated to have declined by just over 2 per cent for 2012 as a whole, essentially in line with the projection made in July. The estimate of the contraction in Italy's GDP for 2013 has been revised from 0.2 to 1.0 per cent as a consequence of the worsening international context and the persistent sluggishness of activity in recent months.
January 2013
The decline in economic activity could come to an end in the second half of this year ... The forecasting scenario nevertheless suggests the possible return to expansion in the second half of the year, albeit at a slow pace and subject to very considerable uncertainty. The cyclical upturn will depend on gradual recovery in investment once credit conditions return to normal and on a pick-up in demand in the euro area and some improvement in the climate of confidence. In this scenario GDP growth would still remain negative year-on-year in 2013 and be slightly positive in 2014.
... but forecasting risk is considerable - The main downside risks relate to domestic demand and credit conditions. The return to positive investment growth rates could be delayed by less favourable developments in business expectations. The impact on banks' lending of a deterioration in their accounts and heightened borrower risk could be more persistent than expected. On the other hand, the further strengthening of the outlook for the euro area could result in more positive developments.
The progress made must be consolidated - Improvements in credit supply, favourable conditions in the government securities market and a revival of confidence that allows the resumption of investment activity are all indispensable for a return to growth. It remains essential to ensure the durability of the progress that has been made in these areas thanks to combined national and European economic policy action. In Italy the adjustment of the public finances must be consolidated, while the reform effort aimed at boosting competitiveness and increasing the economy's growth potential needs to be intensified.
