Economic Bulletin No. 2 - 2016

Growth slows in the emerging economies

The expansion continues in the United States and the other advanced countries, while the emerging economies remain a risk factor for world growth. Fears of a hard landing in China have abated, but its economy continues to slow. The drop in oil prices has not led to a strengthening of global economic activity. The IMF and the OECD have revised downwards their forecasts for growth and international trade. The expansionary stance of monetary policy has intensified in the advanced countries.

Stock markets reflect uncertainty about growth and the direction of banking regulation

Concerns about global growth triggered large price decreases on international financial markets in the early months of this year, which have since been reabsorbed to some degree. The performance of bank stock has been extremely poor throughout the euro area and especially in Germany and Italy. Markets are paying closer attention to credit quality, partly owing to operators’ uncertainty about the direction of banking regulation.

The measures taken by the ECB’s Governing Council …

Growth continues in the euro area, although the risks associated with foreign demand and the uncertain geopolitical situation have increased. The inflation rate stands at zero, reflecting among other things the ample slack in the labour market. The ECB’s Governing Council has introduced a substantial package of expansionary measures over and above what observers expected. It consists of an increase in the size and composition of securities purchases, a further reduction of official rates, and new measures to refinance banks at exceptionally favourable conditions.

… can support economic activity through several channels

Once the new measures had been announced, monetary and financial conditions became more expansionary: yields on public and private sector securities diminished, risk premiums were reduced, and share prices picked up; the euro appreciated, however. Overall, the new measures should support economic activity through several channels: by helping the flow of credit to the economy and lowering its cost; by ensuring certainty as to the availability and cost of bank funding; by cutting the cost of capital for businesses; by bolstering the value of households’ real and financial wealth; and by providing a stimulus to the real estate market. Support for economic activity and employment is a sine qua non to bring inflation back to levels consistent with price stability.

In Italy the economy continues to recover…

In Italy, the cyclical upturn continued in the last quarter of 2015, although at a slower pace, driven by stronger consumption and faster investment growth. According to the latest indicators, in the early months of this year economic activity received a boost from the revival of manufacturing, combined with a more solid recovery in the service sector and building industry. Firms are still optimistic about the outlook for the coming months, although they show signs of caution. We project that growth will be modest again in the first quarter of this year but slightly stronger than in the previous three months.

… but the outlook for exports is less certain

Meanwhile, in Italy too, the outlook for foreign demand reflects increased uncertainty about the trend in world trade. The drop in sales on non-EU markets at the beginning of the year could affect firms’ investment plans despite the boost they have received from the temporary incentives included in the last Stability Law.

Analysts have revised their forecasts for 2016

Given the trends observed in the last quarter of 2015, which were not as good as expected, the main institutions and leading forecasters have slightly revised, by a few tenths of a percentage point, their 2016 growth estimates for Italy, which are now widely put at between 1.0 and 1.2 per cent. There is virtually no change in the projections for 2017.

The labour market shows signs of considerable improvement

The final data signal an upturn in employment in 2015 that exceeds our forecasts of one year ago (0.8 per cent, against the 0.5 per cent predicted in January 2015), despite the partial correction in the early months of this year owing to the reduction in social contribution relief. Trends in employment reflected both the recovery of economic activity and the measures adopted by the Government. There are signs that the new employment contract arrangements and, more particularly, social contribution relief, have caused a shift in hiring towards new open-ended contracts and an expansion of overall employment levels. Unemployment remains high, however, with young people especially hard hit.

Negative inflation is partly a reflection of weak aggregate demand

Inflation is back in negative territory, partly owing to the slump in the prices of energy commodities but also to the persistently and historically low levels of core inflation. Households and firms expect price growth to remain weak in the rest of the year too. In Italy and in the euro area, ample margins of unutilized production capacity and slack in the labour market are effectively dampening price and wage dynamics.

Lending turns gradually upwards; bank deposits increase

The gradual recovery in lending is proceeding, aided by the expansionary spur of monetary policy measures; loans to manufacturing firms are growing at rates of over 3 per cent; those to the construction sector and smaller companies continue to decline. For the banking system as a whole, funding has not been affected by the recent financial tensions: the increase in deposits and the expansion of international interbank borrowing have more than offset the reduction in bonds.

Non-performing loans cease to grow

The persistently high vol-ume of non-performing loans is squeezing banks’ profitability and could limit the disbursement of new credit; however, as the recovery proceeds, there are growing signs of improvement in credit quality. In the fourth quarter of 2015 the flow of new non-performing loans declined again, continuing the trend under way for around a year. Moreover, provisional data suggest that for the first time since the outbreak of the financial crisis the value of non-performing loans in absolute terms has fallen slightly and they have stopped growing as a proportion of total lending. The government guarantee scheme for the securitization of bad debts can ensure their more rapid divestment. At the beginning of April it was announced that a private investment fund would be created to support future capital increases by banks and help divest non-performing debt currently weighing on Italian banks’ balance sheets.

The government presents the 2016 Economic and Financial Document

In 2015 the ratio of general government net borrowing to GDP fell by almost half a percentage. In the Government’s planning scenarios presented in the 2016 Economic and Financial Document it is forecast to decline to 2.3 per cent this year and to 1.8 per cent in 2017. Cyclically adjusted and net of one-off measures the deficit is projected to increase by 0.7 percentage points in 2016 before contracting by 0.1 points in 2017. The ratio of public debt to GDP should begin to decline this year, though at a slower pace than forecast last autumn. Italy’s budgetary position will be assessed by the European Commission after its forecasts are updated in May.

Growth must be consolidated

The prerequisite for a lasting return of inflation to levels consistent with price stability, in the euro area and in Italy, is the reactivation of idle productive capacity and job creation. The consolidation of growth is also vital in order to ward off the formation of negative spirals between stock price movements and the credit market, speed up the elimination of non-performing loans in the banking system, and ensure that the ratio of public debt to GDP continues to decline. The boost from monetary policy measures will continue to provide support to economic activity and prices for as long as deemed necessary; the entire toolbox of economic policies must help attain this objective.

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