Economic Bulletin No. 70 - 2013

The global expansion continues but without gaining pace - World economic activity continues to expand but is showing the effects of the loss of momentum in the emerging economies. The various international organizations have trimmed their growth forecasts, even though the economic slowdown in China appears to have halted in recent months. Uncertainty over impending public finance decisions in the United States, following the failure to approve the federal budget and the consequent partial government shutdown, remains a risk factor for the global economy.

The euro area shows signs of recovery - Economic activity in the euro area returned to growth in the second quarter, after declining for six successive quarters. The latest cyclical indicators suggest that the recovery will continue at a moderate pace in the second half of the year. The signals remain mixed, however.

Financial markets are calm but yields are rising - Conditions on the international and euro-area financial markets remained relaxed overall throughout the summer, despite high volatility. However, uncertainty about the continuation of monetary stimulus in the United States triggered a global rise in long-term interest rates which came to a halt in September, partly owing to the decisions of the Federal Reserve.

The ECB keeps monetary conditions expansionary ... - The ECB's Governing Council confirmed that it would keep official rates at present or lower levels for an extended period of time, in view of the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics. The Council is ready to use all available instruments, including new refinancing operations, to keep short-term money market rates at the level warranted by the medium-term inflation outlook.

...but Italian government bond markets remain vulnerable to changes in the domestic situation - In Italy conditions on the markets for government securities have improved since the summer, partly in response to brighter growth prospects in the euro area, but they are still vulnerable to changes in the domestic situation. In September, as political uncertainty increased, the yield differential with German government securities briefly widened. By mid-October it had eased back to about 230 basis points.

The first favourable signs emerge for the Italian economy - In recent months, thanks in part to the improvement in the economic cycle in Europe, some positive qualitative signals have emerged for the Italian economy. Firms' assessments of the investment outlook, both in industry and services, have improved to levels close to those recorded before the crisis of summer 2011. Industrial production continued to fall in July and, more modestly, in August, but the rate of decrease in real GDP is estimated to have been virtually nil in the third quarter. It is possible that economic activity will return to growth before the end of the year, in line with the forecasts set out in July's Economic Bulletin, aided significantly by a recovery in investment.

A strengthening of business and household confidence is needed to support the recovery - Economic activity has benefited so far from a solid export performance. The gradual improvement under way in business and household confidence could provide the support for domestic demand on which the continuation of the recovery heavily depends. About half of the firms taking part in our surveys believe that the worst is over or that a significant improvement is on its way. Opinions still differ widely, however, and there are considerable reservations about an imminent cyclical turnaround, indicating that the outlook is still precarious.

The payment of general government commercial debts sustains firms' liquidity - According to our surveys, about one third of the firms with commercial claims against general government report having received payment of a fairly large sum, which they intend to use to pay off part of their debts to suppliers and staff, reduce their bank loans and make new investments. The payments appear to have been associated with an improvement in the prospects of the recipient firms.

The current account comes back into surplus - In the first seven months of the year, despite the appreciation of the euro, the current account of the balance of payments continued to improve, showing a surplus of €3.9 billion. Apart from the ongoing fall in imports in the second quarter, a contribution came from the expansion of exports to other EU countries, where Italy took advantage of the cyclical recovery and maintained its market shares.

The decline in employment eases - The fall in employment, which was sharp in the first quarter, was less marked in the second. The unemployment rate went up to 12 per cent in the second quarter, but the rise was more moderate than in the previous ones.

Inflation remains subdued - The twelve-month inflation rate came down to 0.9 per cent in September, a very low level by historical standards. Cost pressures remain insubstantial. Assuming that the rise in the VAT rate that took effect on 1 October is fully passed on, it is expected to have a temporary impact on the price index of less than half a percentage point.

Credit conditions are still tense - Credit supply tensions are still acting as a brake on the economic recovery. The decline in lending to firms and households has continued. Some signs of an easing of the difficulties in accessing credit have emerged from business surveys, but loan supply is still affected by the deterioration in borrowers' creditworthiness because of the protraction of the recession and will improve only slowly.

Banks' retail funding stays robust and their capital position strengthens - The poor economic outlook continues to weigh on the quality of banks' assets and their profitability. However, retail funding is still growing, and the banks' capital base improved in the course of the first half of the year. The resilience of the Italian banking system and its ability to cope with adverse macroeconomic scenarios has been confirmed by the IMF's latest Financial Sector Assessment. The ECB will shortly make a comprehensive assessment of the banks that will be subject to centralized supervision when the single supervisory mechanism comes into force.

The Government is committed to meeting the public finance objectives - In an economic framework that is less positive than had been expected in April, the Government has pledged to keep net borrowing in 2013 below the ceiling of 3 per cent of GDP. Accordingly, on 9 October it approved an adjustment equal to 0.1 per cent of GDP. The primary surplus is now projected at 2.4 per cent. To make sure the deficit target is met, the accounts will have to be monitored closely in the final months of the year. For the next four years the budgetary plans set out in the September Update to the 2013 Economic and Financial Document are consistent with the new European budgetary rules, which centre on the structural performance of the public finances and on the trend of the public debt. The debt is projected to begin to diminish relative to GDP in 2014, with the reduction intensifying in subsequent years.

For this year and next, the Government's macroeconomic framework shows limited divergences from the Bank of Italy forecasts released in July, which have been confirmed to some extent by later cyclical indicators. For 2015-17 the framework projects faster growth than the consensus forecasts, insofar as it assumes the complete materialization of the effects of the structural reforms enacted in the last two years and a significant narrowing of the spread on Italian government securities. The realization of these assumptions depends on the stability of the domestic situation and the continuation of the reform process.

The opportunity offered by the improving economic situation must be seized - It is essential not to squander the opportunities offered by the cyclical improvement in the euro area and the signs of stabilization in Italy. The policy measures supporting firms' liquidity are having positive effects. The commitment to promote growth within a consistent and systematic reform framework and scrupulous compliance with the budget requirements remain essential to overcoming the problems that are sapping the competitiveness of the Italian economy. The strengthening of European institutional arrangements, of which the Banking Union is a fundamental part, must also serve to create more relaxed conditions in the financial markets of the euro area and Italy, helping to break the perverse spiral between sovereign risk and banks.

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