Economic Bulletin No. 1 - 2016

The global outlook remains subject to downside risks

The outlook in the advanced countries is improving, but the weakness of the emerging economies is curbing the growth of global trade, which continues to disappoint, and is contributing to the squeeze on raw material prices. Oil prices have fallen below the minimum levels recorded at the height of the 2008-09 crisis. The projections for the global economy this year and the next envisage a moderate acceleration compared with 2015; at the start of the year, however, significant new tensions emerged in China’s financial markets, accompanied by concerns about its domestic growth.

The US rate hike is initiated, but without repercussions

The raising of the federal funds rate in December by the US Federal Reserve, motivated by the significant improvement in the labour market, marks the end of the zero interest rate policy in the United States adopted from 2008 onwards. Contrary to what some observers had feared, the move has had no adverse repercussions on the world’s financial and foreign exchange markets, thanks to its effective communication and the announcement that monetary conditions would in any event remain accommodative.

The ECB Governing Council steps up monetary stimulus in the euro area

There is a continued though fragile upturn in the euro area. The Eurosystem’s asset purchase programme is proving effective in sup-porting economic activity as a whole and its effects so far are in line with initial assessments. However, weakening foreign demand and falling oil prices have contributed to the emergence of new downside risks to inflation and growth, which in recent months have become more apparent. In December the ECB’s Governing Council took further stimulus measures and expanded the Eurosystem’s asset purchase programme; it stands ready to intervene again if necessary.

Domestic demand in Italy is recovering little by little…

In Italy the recovery is proceeding gradually. The boost from exports which, after supporting economic activity in the last four years, are suffering from the weakness of non-European markets, is gradually being replaced by that of domestic demand, especially consumption and inventory restocking. The upturn in manufacturing is being flanked by signs of an expansion in services and, following a protracted slump, of stabilization in the construction sector. The outlook for investment, however, continues to be clouded by uncertainty about foreign demand. In the fourth quarter GDP is estimated to have expanded at a comparable pace to the previous one, when it grew by 0.2 per cent.

… thanks in part to positive developments in the labour market

The number of persons employed continued to increase during the summer, particularly among young people and in the services industry. The shift in the composition of employment towards more stable contracts also proceeded. In October-November the unemployment rate fell to 11.4 per cent on average, the lowest level since the end of 2012, reflecting in part the decline in youth unemployment, which nonetheless remains at historically high levels. Firms’ expectations regarding employment prospects are cautiously optimistic.

Inflation is still very low

In December inflation declined to 0.1 per cent on an annual basis; households and firms expect it to pick up somewhat in the coming months but to stay at low levels. Inflation is being weighed down by the fresh fall in energy prices but also by persistently ample spare production capacity, which together are keeping core inflation at minimum levels.

Foreign investors continue to make securities purchases

At the end of last December, purchases of Italian gov-ernment bonds under the Eurosystem’s asset purchase programme totalled some €79 billion (of which €73 billion by the Bank of Italy) with an average residual maturity of just over nine years. Foreign investors continued to display interest in Italian assets, slightly increasing the proportion of public securities held; there was a gradual rebalancing of Italian households’ portfolios towards asset management products.

Credit conditions improve…

Growth in private-sector lending strengthened in the autumn while business lending expanded for the first time in almost four years. Credit supply conditions continued to ease: the average rate on new loans to firms is at a historically very low level and the differential with respect to the corresponding euro-area average has been wiped out (at the end of 2012 it was equal to around 1 percentage point). The dispersion of lending conditions by sector of activity and firm size remains considerable, though it has diminished with respect to the peaks reached during the recession.

…and the cyclical recovery is reflected in loan quality and banks’ profitability

Thanks to the gradual improvement in economic activity, the flow of new non-performing loans and of new bad debts has continued to abate with respect to the record volumes observed in 2013. In the first nine months of 2015 the profitability of Italy’s leading banking groups increased compared with the previous year and capital adequacy was strengthened. The improvement in banks’ balance sheets looks set to continue in 2016, as a consequence of the expected consolidation of the recovery.

The recovery has the potential to strengthen in the next two years…

Output is estimated to have risen by 0.8 per cent overall in 2015 or by 0.7 per cent based on the quarterly accounts, which are adjusted for calendar effects; it could increase by around 1.5 per cent in 2016 and in 2017. Inflation should climb gradually, reaching 0.3 per cent this year and 1.2 per cent in 2017. Despite sluggish growth to date, investment could benefit from the more favourable outlook for demand and funding conditions and from the effects of the stimulus measures contained in the Stability Law. The recovery in disposable income, in part associated with the stronger labour market, is expected to boost consumption.

…but economic policy support is decisive…

These projections are largely aligned with those of July but the relative weight of the contributing factors has changed: the weaker stimulus from foreign trade, owing to the slowdown in the emerging economies, is expected to be replaced by a greater contribution from demand both in Italy and in the euro area, supported by economic policies such as the Eurosystem’s asset purchase programme and Government measures, and by the improvement in credit conditions.

…as downside risks emerge that must be countered

Significant risks remain, however, most notably those associated with international developments, as highlighted again in recent weeks. In particular, there is the possibility that the slowdown of the emerging economies could turn out to be more severe and lengthier than assumed to date, with heavy repercussions on financial and foreign exchange markets. At the same time monetary policymakers must take decisive action to combat the downside risks to inflation, which could stem either from lower-than-expected growth in demand, should there continue to be ample spare production capacity for an extended period, or from further drops in commodity prices, were they to trigger second-round effects on wage growth. In order for our forecasting scenario to come about, the confidence of households, firms and financial operators must remain unshaken in Italy and in the euro area, and economic policies to support the economy must be pursued with determination.

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