The global outlook is affected by uncertainty concerning China
Activity continues to expand in the main advanced countries, but the slowdown in the Chinese economy has adversely affected commodity prices and economic activity in the emerging countries. China’s path of adjustment from its high levels of investment and debt is a factor of fragility for that country and a risk for the world economy. The uncertainty clouding the global macroeconomic situation influenced the Federal Reserve’s decision not to start raising its reference rates in September.
In the euro area the recovery proceeds, but there are downside risks …
The latest data all confirm that economic activity in the euro area continued to expand during the summer months. So far the global slowdown has had a limited effect on the area, but looking ahead it poses a downside risk for growth and inflation. The latter returned to negative territory in September (-0.1 per cent for the twelve-month rate), owing in part to the fall in oil prices.
… which the ECB is determined to combat
The expansive measures adopted by the Governing Council of the ECB have provided support to economic activity and to the recovery in credit. The Council stands ready to use every available instrument, including adjustments to the size, composition and duration of the asset purchase programme, if this proves necessary to combat the downside risks and ensure the return of inflation to values consistent with the definition of price stability.
The Volkswagen scandal is an additional source of uncertainty
The fraud perpetrated by the German car man-ufacturer Volkswagen has affected the performance of the stock markets and the climate of confidence in Germany, introducing a new element of uncertainty for the European economies. The possible repercussions are still difficult to quantify; they will depend on the magnitude of the effects on the automotive sector as a whole (which up to now has contributed decisively to the cyclical upswing), on the German industry and on supplier businesses in other countries, as well as on investors’ and consumers’ expectations.
In Italy the main indicators confirm the cyclical upturn …
Economic activity in Italy has been expanding since the beginning of 2015, at an annualized rate of about 1.5 per cent. The latest cyclical signs – including the gain in industrial production, the strengthening of household and business confidence and the rise in purchasing managers’ indices – indicate that the expansion continued in the third quarter at about the same pace as in the first half of the year. After years of contracting domestic demand, the strengthening of the recovery in private consumption and the gradual revival of investment in productive capital are contributing to the expansion of output. According to the latest surveys, most firms judge the direct effects of the economic slowdown in China on their own activity to be limited so far; the impact appears to be more pronounced only for some large exporting firms.
… with favourable developments in the labour market
Employment has made significant gains during 2015, rising by 0.8 per cent on average over the first eight months compared with the previous year. The evidence to date indicates that the increase in payroll employment is the consequence above all of the cyclical recovery, but it has also benefited from the Government’s recent measures for social contribution relief and labour market reform. The unemployment rate, which nearly doubled between 2008 and 2014, continued to inch down during the summer. Firms are moderately optimistic about the job outlook.
Inflation remains low
The rate of increase in consumer prices, which has been affected by the new decline in oil prices, is still very low (0.2 per cent in the twelve months to September). By contrast, core inflation continues to edge up, still driven by the acceleration in the prices of services. Households and firms expect very low but gradually rising inflation in the coming months. The percentage of consumers who expect prices to fall has diminished.
Credit conditions gradually improve …
The improvement in the credit market has con-tinued, fostered by the cyclical upturn and the measures adopted by the ECB Governing Council. After a long period of contraction, lending to the non-financial private sector stabilized during the summer. In the twelve months to August the decline in lending to firms slowed to 0.8 per cent and the growth in credit to the manufacturing sector strengthened to 1.8 per cent. Credit dynamics have reflected the situations of firms in the various sectors, remaining more favourable for those with no repayment irregularities. There has been a further small decrease in the cost of new loans to firms, although the dispersion of terms on single loans remains significant.
… and the flow of new non-performing loans slows
The improving macro-economic picture has had a positive effect on the flow of new non-performing loans, which decreased in the second quarter. Preliminary data for July and August indicate a decrease, compared with May and June, in banks’ total exposure to borrowers with loans reported as bad debts for the first time. The long recession’s legacy of bad debt remains very substantial: at the end of June, total bad debts were equal to 10.3 per cent of outstanding loans.
Measures affecting banking are enacted
In August the Italian Parliament approved mea-sures to increase the speed and efficiency of bankruptcy and enforcement procedures and allow the immediate tax deductibility of loan write-downs and losses, with the aim of removing some of the causes of the huge overhang of bad debt and encouraging the establishment of a secondary market in impaired assets. Discussions are still under way between the Italian authorities and the European Commission on the advisability of setting up a special purpose company for the acquisition of bad debts, with the ultimate objective of restoring an adequate flow of credit to the economy.
Foreign purchases of Italian government securities continue
Foreign investors’ demand for Italian government securities remains high. From March to July non-residents made net purchases worth €21 billion, an amount only slightly less than total net issues. The considerable increase in the Bank of Italy’s net debtor position in TARGET2 since the spring reflects ample liquidity creation and the diminished supply of government securities as a result of the Treasury’s issuance policy and the monetary policy operations carried out by the Bank. Both these factors led Italian banks to reduce interbank funding abroad and residents to readjust their portfolios towards foreign assets.
The Government revises its growth projections upwards …
In the Update to the 2015 Economic and Financial Document, presented on 18 September, the Government raised its estimates of GDP growth for this year and, in the planning framework, for 2016 as well. The revisions for the current year are consistent with the latest cyclical data, which suggest a slightly better outlook for the domestic components of demand than had been expected.
… and plans to reduce taxes on households and firms
The Government intends to reduce the tax burden on households and firms. For 2016 the Update foresees no triggering of the tax increases called for by earlier safeguard clauses and the introduction of tax relief on home ownership. For the coming year, the decrease in revenue will be financed only in part by spending cuts; overall, the programme envisages a reduction in the pace of fiscal adjustment. The debt/GDP ratio is slated to start diminishing in 2016. The measures planned and their financing will be specified in the Stability Law, the draft of which was approved by the Council of Ministers on 15 October.
The favourable conditions for reducing the debt need to be exploited
The start of a gradual reduction in taxes coincides with the need to lower Italy’s high ratio of tax and social security contributions to GDP, which acts as a brake on economic growth. From this standpoint, the measures with the most immediate effect on growth potential are those that lighten the burden on productive factors; the elimination of taxes on primary residences may have only a limited impact on consumer spending. At the same time, the timetable for fiscal consolidation must guarantee a clear and steady reduction of the debt and, to this end, the opportunity offered by exceptionally favourable financial and monetary conditions and the gradually strengthening economic recovery must be exploited in full.
