Economic Bulletin No. 2 - 2015

World trade expands but geopolitical conditions remain uncertain

Economic activity has strengthened in the United States, the United Kingdom and Japan, while weakening in some of the emerging economies. A modest acceleration in world trade is forecast for 2015. The price of oil, though up slightly from its mid-January minimum, is expected to remain low. Uncertainty over the situation in Greece and the conflicts in Ukraine, Libya and the Middle East is still acute, although it has not had any impact on the international financial markets to date.

The Eurosystem begins its expanded asset purchase programme …

The Eurosystem has expanded its programme of asset purchases to include public securities. Total purchases of €60 billion a month are planned at least through September 2016, and in any case until the path of inflation in the area is consistent with the objective of price stability (an inflation rate below, but close to, 2 per cent over the medium term). The programme is designed to dispel the risks inherent in a prolonged period of low inflation; it will be carried out resolutely and implemented in full.

… with positive effects on the markets

The programme has already had a significant impact on the financial and foreign exchange markets. The area-wide average yield on ten-year government bonds has hit a new all-time low of 0.6 per cent, and the euro has depreciated by 15 per cent against the dollar since November. Inflation expectations, which had been falling steadily until January, have since stabilized and turned upwards.

The talks on macroeconomic adjustment in Greece continue

The Eurogroup has approved the Greek government’s request for a further extension of the deadline for completing its macroeconomic adjustment programme, on which European support measures are conditional. However, the negotiations have been under way for more than a month, and their outcome remains highly uncertain. The Greek government has pledged to complete the reform process, to meet its obligations to creditors, and to guarantee the sustainability of the public debt. A detailed programme of the measures to be enacted should be agreed by the end of April; reaching an agreement on schedule is in the common interest.

In Italy, the signs are more favourable but are not yet consolidated

The favourable cyclical signs have strengthened in Italy, although the upturn still needs to find a firm footing. Although GDP did not grow in the fourth quarter, the national accounts show that household consumption increased, exports accelerated and capital investment, especially in machinery and transport equipment, picked up slightly. Industrial activity has been hesitant in the early part of the year, but household and business confidence has improved markedly.

Employment prospects appear to improve somewhat

Although the number of persons in work decreased marginally in the fourth quarter, reflecting the fall in construction jobs, employment stabilized in January and February; the unemployment rate has come down slightly, but mainly as a result of declining labour market participation. The most recent surveys have found that households and firms expect employment prospects to improve moderately in the next few months, possibly thanks to the social contribution relief introduced in January and the provisions of the Jobs Act, which went into effect in March.

Price dynamics remain weak

Consumer price inflation was virtually nil in the early months of 2015, owing above all to the decline in energy prices and the relative slackness of the core components. Business surveys have nevertheless found some initial positive signs in connection with less pessimistic assessments of demand.

The expanded asset purchase programme benefits the Italian financial markets …

Under the Eurosystem’s expanded asset purchase programme, the Bank of Italy will buy about €130 billion worth of Italian government securities; including the operations of the ECB, total purchases of Italian public securities will amount to around €150 billion. Conditions on Italian financial markets improved considerably right from the announcement, on 6 November, of the start of preparatory work for the programme. The yields on government securities, risk premiums on sovereign and private debt, and spreads on the credit default swaps of the major banks all fell. The rate on ten-year government bonds came down by 1.2 percentage points, from 2.5 to 1.3 per cent, between the announcement of the preparatory work and the actual commencement of the purchases, and since then it has stayed slightly below 1.3 per cent. Share prices have risen sharply, and their volatility has diminished.

… and can stimulate economic activity

On the basis of its impact on interest rates and the exchange rate, the expanded asset purchase programme could raise GDP by more than one percentage point in 2015-16. Overall, assuming the full implementation of the programme, Italian GDP growth should exceed 0.5 per cent this year and be around 1.5 per cent next year. These effects may be mpanied by others – not easily quantifiable – if a generalized rise in asset prices due to portfolio rebalancing were to provide additional incentives for consumption and investment. Another factor supporting GDP is the fall in oil prices since mid-2014, which will contribute around half a percentage point in the two years. However, a further improvement in household and business confidence remains indispensable.

Credit conditions continue to show signs of improvement

Italian banks are in the process of incorporating the results of the comprehensive assessment in their balance sheets. Surveys indicate that the terms of lending to firms have improved further but are still differentiated according to the size and economic sector of the borrower. Average lending rates have come down but remain higher than the corresponding euro-area rates. Presumably they will fall further in the next few months owing to the decline in market yields. However, the contraction in lending to firms has continued; that in lending to households has practically come to a halt. Italian banks made ample recourse to the third targeted longer-term refinancing operation, which may help foster an expansion of credit to the economy.

The Government presents its Economic and Financial Document

In 2014, despite the contraction of output, general government net borrowing was practically stable at 3.0 per cent of GDP. According to the Government’s 2015 Economic and Financial Document, net borrowing will fall to 2.6 per cent in 2015  and 1.8 per cent in 2016; on a cyclically adjusted basis and net of one-off measures, net borrowing is projected to decline from 0.7 to 0.5 per cent this year and to 0.4 per cent next year, and budget balance is projected for 2017. The ratio of debt to GDP is forecast to start falling in 2016.

Support to demand must be accompanied by measures to increase potential growth

Italy’s exit from the long recession requires strong measures on both the demand side and the supply side. The stimulus provided by macroeconomic policies has increased significantly in the last few quarters, laying the basis for a recovery in domestic demand as well as consolidating the performance of exports. To sustain the growth of output over the medium term and achieve a durable expansion of employment, however, it is essential to increase potential GDP. For this, the process of reform  must continue. Improving the legislative framework and the conditions for investment can help Italian firms to respond and adapt successfully to the structural changes that are under way in the world economy.

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