The world economy shows signs of strengthening - Signs of a cyclical improvement in the United States and some emerging economies appeared in the first quarter. Overall, world output growth is expected to remain modest this year and then to gather strength in 2014. Uncertainty persists about US fiscal policy and the sovereign debt crisis in Europe.
In the euro area, economic activity remains weak - After the contraction of euro-area GDP in the fourth quarter of 2012, economic activity appears to have practically stabilized in the first three months of 2013. Domestic demand is still slack, however, even in countries not affected by the sovereign debt crisis. Inflation continues to decline; it has fallen below 2 per cent for the first time since 2010 and is expected to abate still further in the coming months. Its moderation is confirmed by firms' pricing intentions and households' expectations.
On the whole, financial market trends are positive ... In the initial weeks of 2013 the financial markets of the euro area continued the improvement that had begun last summer. In the countries affected by the sovereign debt crisis, yields on government securities diminished in January. The TARGET2 balances, which reflect capital movements among the payment system's member countries, displayed an overall reduction in disequilibria.
... but tensions reemerg - New tensions have arisen on European stock markets and sovereign debt markets in recent weeks, however, in connection with renewed uncertainty about economic growth, the outcome of the general election in Italy, and above all the deepening of the crisis in Cyprus, which spotlighted problems of coordination between European authorities and national governments. But the rise in government securities yields in the countries most exposed to the strains proved to be largely transitory.
Monetary policy remains expansive - The ECB's policy stance has remained expansive. The outstanding stock of liquidity supplied to banks by the Eurosystem has diminished as a result of voluntary early repayment of part of the funds obtained in the three-year refinancing operations of December 2011 and February 2012. The ECB Governing Council has reaffirmed that its monetary policy stance will remain accommodative for as long as necessary, with full allotment of the liquidity requested by banks. In early April it made clear that it stood ready to take further action, based on its assessment of incoming information.
The deterioration in the Italian financial markets is limited - The Italian financial markets have been affected by the political uncertainty to a limited extent. The spreads between Italian and German government securities have increased since the end of January but remain well below their 2011 peaks. The latest data on the TARGET2 payment system indicate a resumption of capital inflows to Italy. However, bank liabilities (shares, credit default swaps) have felt the effects of the way in which the crisis in Cyprus was handled.
The economic contraction in Italy eases ... In Italy, after the further steep fall in GDP in the fourth quarter of 2012, the indicators for the first quarter suggest that output has continued to decrease, but less sharply. For the quarter as a whole the decline in industrial production appears to have virtually ceased, thanks to the good performance of exports.
... but financial conditions and business confidence remain uncertain - So far, cyclical surveys do not point to any significant change in the short-term outlook. The likelihood of an upturn continues to depend mainly on the evolution of business confidence and financial conditions over the next few months and their impact on investment. Firms' assessments do not indicate any improvement in the incentives to invest, but their expectations for foreign orders have improved modestly, albeit in a volatile context.
Commercial claims on general government affect firms' liquidity - The Government has drafted measures for the payment, within the next twelve months, of €40 billion in arrears owed by general government and tax refunds. The measure will improve firms' situation and will have a positive macroeconomic impact, whose magnitude will depend on the time frame of the action and how firms use the funds.
The current account is back in balance - The current account improved substantially in 2012 and was in surplus in the fourth quarter for the first time in seven years. The fall in domestic demand, which curbed imports, was a factor, but the growth of exports also contributed.
Employment continues to decline - Average employment diminished by 0.3 per cent in 2012 compared with 2011, while the labour force expanded rapidly. Developments in the first few months of 2013 indicate that the employment outlook remains poor. The unemployment rate rose to 11.6 per cent in February. Real per capita earnings fell faster in 2012 than they had in 2011 and are expected to continue to decline, even if more slowly, for the rest of this year.
Inflation slows further - With the end of the effects of past indirect tax increases and a sharp slowdown in energy prices, inflation continued to fall in Italy as elsewhere. In March the twelve-month growth in the harmonized index of consumer prices came to 1.8 per cent, barely above the euro-area average and in line with expectations for 2013 as a whole. Business surveys report plans for very modest price rises because of the weakness of domestic demand.
Credit conditions remain tight, reflecting the impact of the economic situation - Against a backdrop of progressively deteriorating credit quality, in the early months of this year lending to firms continued to decline, although not as fast as in the second half of 2012, and lending to households also diminished. After the slight increase in the fourth quarter, the cost of credit to firms has stabilized but remains about one percentage point higher than the euro-area average.
The banking system is well capitalized - At the end of 2012 the default rate on loans to firms was nearly as high as in the recession of the early 1990s. However, Italian banks' capital structure remains solid and is sufficient to withstand the poor cyclical conditions, as the IMF's Financial Sector Assessment Program recently confirmed. In December Italian banking groups had an average core tier 1 ratio of better than 10 per cent; for the five largest groups it was 10.9 per cent.
The public finances improve - General government net borrowing decreased in 2012 for the third consecutive year, falling to 3.0 per cent of GDP and thus foreshadowing the closure of the excessive deficit procedure opened against Italy in 2009. According to the Government's recent estimates, which factor in the effect (estimated at 0.5 percentage points) of the payment of part of general government bodies' commercial debts to firms, net borrowing will amount to 2.9 per cent of GDP this year. Net of interest expenditure, there was a budget surplus of 2.5 per cent of GDP in 2012. The further increase in the primary surplus expected for 2014 will permit the stabilization of the ratio of debt to GDP even if the latter's growth is modest.
Uncertainty must not be allowed to affect growth - The relative stability of conditions on the Italian financial markets reflects the improvement in the country's public finances as well as the credibility of the commitment of European institutions to sustain the Economic and Monetary Union. Nonetheless, it is necessary to continue with effective, credible economic policies that can break the recessionary spiral that has gripped Italy almost continuously since 2008. The uncertainty surrounding the domestic situation and the re-emergence of turmoil in the euro area must not be allowed to undermine the outlook for economic recovery.
