Negotiations for an agreement with Greece prove difficult
Uncertainty over the prospects for Greece built up rapidly after the talks with creditor institutions and countries on the extension of the support programme broke off and as a result of the outcome of the referendum called unexpectedly by the Greek authorities. The developments of the last few weeks have significantly increased the volatility of euro-area financial markets and share prices. However, the increase in risk premiums on government securities was moderate, all in all, thanks to the battery of instruments at the disposal of the Eurosystem, the advances made in European governance and the reforms undertaken by individual member countries.
On 13 July an agreement is concluded
After difficult negotiations, on 13 July the area’s leaders concluded an agreement with Greece. The agreement made the start of talks towards a third support programme conditional on the Greek Parliament’s enacting a detailed package of stringent measures, the first set of which were successfully passed on 15 July. After the announcement of the agreement, financial market conditions improved. In order to forestall the resurgence of tensions, resolute European and national economic policy action must be taken to foster a return to growth in Greece and in the euro area as a whole.
The emerging economies slow down and Chinese share prices plummet
The global economic recovery has continued but shows signs of slowing, the consequence of factors that are temporary in the advanced economies and more persistent in the emerging ones. World trade is forecast to accelerate this year. So far the excess supply in world oil markets has helped to hold prices to levels only marginally higher than the lows recorded at the start of the year. The world economy is weighed down by uncertainties regarding the pace of official interest rate increases in the United States and financial instability in China, taking the form of a sharp stock market fall halted only by massive public intervention, which could curtail Chinese economic growth.
In the euro area monetary expansion sustains economic activity and prices
Following the inception of the Eurosystem’s asset purchase programme, long-term interest rates in the euro area declined sharply until the middle of April. They then turned upwards, partly in response to the improved prospects for inflation and growth engendered by the programme itself, and recouped most of the earlier decline. All told, conditions on the financial and foreign exchange markets continue to support the economic recovery and price dynamics. Inflation moved back into positive territory in May, at 0.3 per cent, for the first time since the end of last year. The Governing Council of the ECB has reaffirmed its determination to implement the programme in full; it will counter any unwarranted tightening of monetary conditions.
In Italy the gradual pick-up in economic activity proceeds, led by domestic demand
The Italian economy has begun to expand. Improvement in business and household confidence has been accompanied by a recovery in domestic demand, which is once again contributing to growth. Investment, which had contracted almost without interruption since 2008, recorded an upturn, with the first positive signals now visible in the construction industry as well. Firms’ investment plans indicate a vigorous expansion of capital formation by the larger companies this year and a more prudent attitude on the part of medium-sized and especially small firms. According to the most recent cyclical indicators, growth continued in the second quarter at about the same pace as in the first.
Employment grows modestly
Employment began to grow again in April-May. The unemployment rate stabilized. Since the start of the year there has been a significant increase in the share of new permanent jobs, incentives for which were contained in recent government measures. Recourse to the wage supplementation scheme diminished during the spring. The number of firms expecting to increase staff has risen, although most still expect no change in their workforce.
Inflation turns positive
The rate of inflation, which was negative at the start of the year, has come back up above zero but remains at historically very low levels. The expectations of households and firms point to a further rise.
The monetary expansion is feeding through to credit conditions
The monetary expansion, and in particular Italian banks’ ample recourse to targeted longer-term re-financing operations and the Eurosystem’s asset purchase programme, is gradually feeding through to credit conditions. The reduction in the cost of business loans has proceeded and has now extended beyond the most creditworthy firms. In opinion surveys, small and medium-sized companies too are now reporting easier access to credit. The decline in loans to firms has moderated, and lending to manufacturing firms and households is expanding for the first time in three years.
The large volume of non-performing loans subtracts resources from the financing of the economy
The long recession’s legacy of a large volume of non-performing loans nevertheless continues to hold back the growth of lending, subtracting resources from the financing of economic activity. Speeding up the disposal of these claims would help to underpin credit dynamics. The measures approved in June by the Council of Ministers should remove some regulatory obstacles, providing for accelerated tax deductibility of write-downs and loan losses and making credit recovery procedures more efficient. The ensuing increase in the value of non-performing loans could encourage the formation of a secondary market for these assets. Discussions are under way between the Italian authorities and the European Commission on the creation of an asset management company specializing in the purchase of such claims.
The forecasting scenario is for progressively stronger growth …
The projections for the Italian economy set out in this Bulletin indicate a progressive strengthening of the cyclical recovery. In our central scenario, GDP expands by 0.7 per cent in 2015 and accelerates to 1.5 per cent in 2016. Consumer price inflation increases gradually, from 0.2 per cent this year to 1.1 per cent in 2016. The recovery in economic activity translates into a progressive expansion of employment, which should grow by 1.5 per cent in the two years. The unemployment rate declines from the 12.6 per cent registered in 2014 to 11.9 per cent in 2016.
… thanks to a recovery in investment …
The upward revision of the growth forecast, which amounts to more than half a percentage point over the two years compared with the projections made in the January Economic Bulletin, is largely ascribable to the performance of investment, which is nevertheless still projected to be below its historical average in relation to GDP in 2016.
… based on monetary expansion and credit normalization …
The scenario described here posits the continuing effects of monetary stimulus on the exchange rate, long-term interest rates and credit conditions. It further assumes gradually strengthening foreign demand, especially from our European partners, oil prices remaining at their current levels, and an essentially neutral fiscal policy stance, in line with the Government’s programmes. The measures to narrow the tax wedge on labour enacted with the 2015 Stability Law are expected to add 0.2 percentage points to employment growth. Some additional stimulus to labour demand – hard to quantify and for this reason not factored into the projections – could come from the Jobs Act.
… and the determination to complete the reforms planned
The risks to the growth forecast appear to be balanced this year but are prevalently on the downside for 2016. They derive largely from the world and European context, and in particular the risk of a deeper and longer slowdown in the emerging economies than is now assumed, the possibility that monetary normalization in the United States may be accompanied by fresh turmoil in the foreign exchange markets and in capital flows, and renewed financial market tensions. The risks would be heightened if it were perceived that the determination to carry through the reforms that are necessary to boost Italy’s potential growth was lacking. Heightened uncertainty could act as a brake on investment growth and impede the recovery in consumption, which are essential conditions for a return to sustained growth.
