Growth strengthens globally but weakens in the emerging economies - The global economic expansion, which had gained pace in the first quarter thanks to stronger growth in several advanced countries, continued in the second quarter. However, the persistent sluggishness of activity in the euro area and a deceleration in the emerging economies of Asia kept the expansion of world trade at modest levels. The prices of energy and non-energy commodities declined, favouring a generalized fall in inflation.
Uncertainty about monetary policies induces market volatility - Conditions on world financial markets reflected investors' uncertainty about the duration of the policy of quantitative easing in the United States and the growing concern about credit conditions in China. The decline in prices mainly involved the emerging countries; it has been transmitted, if only to a limited extent, to the euro area, where government securities prices have also been affected by the political uncertainty in Portugal. The downgrading of Italy's sovereign debt by Standard & Poor's has had only limited effects on demand and yields.
In the euro area the recession moderates - In the euro area GDP contracted again in the first quarter, the decline spreading to the countries not directly exposed to the financial market strains. The latest cyclical indicators suggest a possible stabilization of economic activity, but at modest levels. The Eurosystem's June projections indicate a decline in GDP of 0.6 per cent this year, 1.5 percentage points worse than had been forecast last September.
The ECB Council indicates that official rates will remain low for an extended period - The ECB Governing Council, after reducing its main refinancing rate to an all-time low of 0.50 per cent in May, announced at the start of July that it expected its key rates to remain at present or lower levels for an extended period, given the subdued outlook for inflation, the broad-based weakness in the real economy and subdued monetary dynamics. At the same time, as announced in May, refinancing operations will be conducted at fixed rates with full allotment as long as necessary and at least until July 2014.
In Italy GDP declines more slowly - According to our estimates, GDP in Italy declined less steeply in the second quarter than in the first. The latest surveys suggest that firms' investment activity may stabilize in the second half of the year. The decline in industrial production appears to have halted in the last few months.
Inflation decreases again - Consumer price inflation, measured by the harmonized index, fell from 1.8 per cent in March to 1.4 per cent in June, mainly thanks to the decline in energy prices. According to our projections, which incorporate the technical assumption of the increase in VAT currently scheduled for October, inflation will continue to average around 1.5 per cent in 2013 and 2014.
Lending continues to contract... - Credit market conditions remain tight. In the first four months of the year there was a more marked decline in lending to households and an even larger fall in lending to firms. The problems are universal but most pronounced for small and medium-sized enterprises, which are less able to replace bank loans with other forms of finance.
...partly as a result of the increase in credit risk - The decline in lending reflects the persistent weakness of the demand for credit but is also still influenced by the restrictive conditions on the supply side. Despite the abundance of liquidity, banks' lending policies are restrained by the heightened credit risk caused by the persistent recession. The greater riskiness of loans has affected the cost of credit, offsetting the favourable effects of the reductions in official rates and the easing of sovereign debt market tensions.
In the first quarter of 2013 the ratio of new bad debts to outstanding loans rose to 2.8 per cent; for firms alone, the ratio rose to 4.5 per cent. According to leading indicators, the flow of new bad debts is likely to remain high for the rest of the year. Nevertheless, the banks' capital base, which was strengthened during 2012, remains generally sound.
Our central GDP projection for 2013 reflects the slowdown in the first half of the year... - Like other institutions' forecasts, this Bulletin's GDP projection for 2013 has been revised downwards by nearly 1 percentage point compared with the January figure (from -1.0 to 1.9 per cent, although this is subject to considerable uncertainty). The revision reflects the performance of GDP during the first half of the year, which proved to be worse than had been expected in January, above all owing to the slowdown in world trade and the persistent strains in the credit market, which have delayed the exit from the recession.
...followed by a stabilization late in the year and a recovery in 2014 - Economic activity is expected to stabilize at the end of 2013, and the recovery should strengthen in 2014, with average growth of 0.7 per cent for the year, thanks to an acceleration in foreign trade and a gradual resumption of productive investment. The latter is likely to be assisted by the improvement in firms' liquidity when the payment of general government commercial debts is unfrozen.
Consumption continues to be slack and employment weak - Household spending, restrained by the performance of disposable income and by acute uncertainty regarding the labour market outlook, is expected to remain weak, however; after declining further this year, it appears set to stagnate in 2014. Conditions in the labour market, which typically react to changes in economic activity with a lag, are expected to continue worsening throughout this year. A timid employment recovery is expected only in the second half of 2014. The number of persons in work is projected to diminish by around 1.5 per cent in the two years 2013-14; the seasonally adjusted unemployment rate, which rose above 12 per cent in May, is likely to come close to 13 per cent in the course of 2014.
The external current account returns to surplus - The current account of the balance of payments is expected to swing into surplus by about 1 per cent of GDP in 2014, in response to slowing imports, growing exports, especially to markets outside the euro area, and falling oil prices.
Fiscal consolidation proceeds - The budget packages enacted in the second half of 2011 have enabled Italy to exit from the excessive deficit procedure opened in 2009. By our estimate, net borrowing will be practically unchanged this year in relation to GDP, despite the outlays in connection with the payment of general government commercial debts.
The timing of the recovery is subject to downside risks - The projected recovery in economic activity late this year is subject to downside risks, mostly in connection with the outlook for the world economy, firms' liquidity conditions and the terms of credit supply.
Foreign demand could prove to be weaker than projected if growth in the main emerging economies slows down and the cyclical weakness in Europe persists.
Our forecasting scenario also depends on the full implementation and effectiveness of economic policy measures. The provision for unfreezing general government commercial payments could be less effective than expected if the payment schedules are not met or if firms, given ample spare capacity and slack demand, set a substantial portion of the funds aside for precautionary purposes.
Finally, the timing and strength of the recovery could be jeopardized by an increase in spreads on Italian government securities, which owing to the size of the public debt and the poor prospects for economic growth remain sensitive to variations in investor confidence and the assessments of analysts. Achieving the fiscal adjustment objectives is a necessary condition for the containment of risk premiums, which must also be shielded from the possible adverse effects of uncertainties about the domestic situation. An increase in spreads would have repercussions on banks' funding and hence on the availability and cost of credit to firms and households.
