The outcome of the referendum in the United Kingdom …
The consultative referendum of 23 June in the United Kingdom, in which the majority voted for the country to leave the European Union, has created an unprecedented situation in the history of European integration whose ultimate repercussions cannot readily be foreseen. The IMF has judged the resulting uncertainty to pose a risk to the global economy.
… affects the markets …
The impact on the foreign exchange and financial markets was immediate; the monetary authorities immediately took countervailing action, which helped to absorb some of the shock in the days that followed. The pound depreciated; the euro, though gaining against sterling, weakened against the other main currencies, remaining practically unchanged in nominal effective terms. Yields on euro-area government securities, benefiting from the Eurosystem purchase programme, were unaffected, while share prices fell steeply.
… and particularly bank shares
The widespread increase in risk aversion had an especially strong impact on the share prices of the sectors considered most exposed to an economic slowdown, with euro-area bank stock prices especially hard hit. From the date of the referendum up to 8 July, bank shares lost 29 per cent in Italy, 26 per cent in Germany and 23 per cent on average in the euro area. The slump in Italian bank shares was aggravated by the recession’s heavy legacy of non-performing loans and by fears that current market conditions may make it harder for banks to dispose of such exposures or to raise capital.
The ECB Governing Council stands ready to intervene if necessary with all available instruments
The ECB is ready to intervene if warranted and is in close contact with the other central banks, fulfilling its mandate of ensuring price stability and financial stability in the euro area. The area-wide cyclical expansion appears to have proceeded in the second quarter, albeit at a slower pace than in the first, and consumer price inflation edged back into positive territory in June; growth and inflation should be stimulated by the monetary policy measures already in place. An additional contribution could come from the impact on credit supply of the new series of targeted refinancing operations launched in June, under which Italian banks have been allocated about €139 billion so far (€29 billion net of repayments of the funds obtained in the first series).
In Italy, the recovery continues at a slower pace
The recovery has proceeded gradually in Italy, driven by domestic demand, even though exports have suffered from the weakness of non- EU markets. Household consumption has benefited from the increase in disposable income and the improvement in the job market; investment has continued to grow, buoyed among other things by the incentives introduced with the last Stability Law. However, the cyclical indicators suggest that, as in the euro area as a whole, GDP expanded more slowly in the second quarter than in the first.
Firms are planning to increase investment
In our surveys, conducted before the British referendum, firms indicated that they planned to increase investment during the year (still historically low as a percentage of GDP), thanks in part to easier access to credit and to the tax incentives enacted last December; the rate of capital formation is likely to be higher among companies that do business mainly on the domestic market and among larger firms. Around 60 per cent of the industrial firms surveyed intend to expand plant capacity, mostly on the strength of their perception of more favourable demand developments. Still, the surveys reveal that uncertainty about the international context remains a significant deterrent to more decisive expansion of investment by Italian firms.
Employment continues to improve
Though more slowly than in the previous year, when social contribution relief on new hires was applied in toto, the rise in the number of persons in work continued in the first quarter of the year. The overall unemployment rate remained stable owing to the increase in labour market participation, but unemployment among young people diminished further.
Inflation stays negative
Consumer price inflation has been negative since February; its performance reflects the decline in energy prices, but also the very low rate of core inflation, which continues to show the effects of ample margins of unutilized production capacity. Households and firms expect the rise in prices to remain modest in the coming months. According to professional forecasters, consumer price inflation will be barely positive on average this year.
The recovery is gradually benefiting credit growth and quality
Lending to the nonfinancial private sector is expanding at a modest pace, though more strongly in the sectors where the economic recovery has taken firmer root. Loans to firms as a whole are stagnating but those to manufacturing companies are increasing apace. Credit quality is gradually benefiting from the cyclical recovery: in the first quarter of 2016 the ratio of new non-performing loans to outstanding loans declined further; for banking groups, the stock of NPLs also fell as a percentage of outstanding loans compared with the previous quarter, both gross and net of write-downs.
Measures to safeguard financial stability are being considered
The widespread uncertainty in the markets prompted the Italian Government to notify the European Commission, which has given its approval, of its intention before the year is out and only if necessary to guarantee new issues of bank liabilities; the guarantee will be priced at market terms and comply with the rules on State aid. Market conditions could generate systemic risks for individual member states and for the euro area as a whole, requiring some form of public financial backstop. With reference to the results of stress tests, EU rules explicitly envisage precautionary recapitalization for banks in order to prevent serious disruptions to the economy and to safeguard financial stability.
The prospect of Brexit may affect the economic outlook …
Our projections, prepared as part of the Eurosystem staff macroeconomic projections and released on 6 June, indicated growth of the Italian economy driven by domestic demand in the three years 2016-18 and a very gradual rise in the rate of inflation. The effects on the macroeconomic outlook of the referendum on the United Kingdom’s exit from the European Union are still hard to evaluate; in any event, the risks have increased considerably.
… though with limited direct effects …
The effect of Brexit on the forecasting scenario depends on mostly hypothetical outcomes. The implications for the projections of movements in the financial, foreign exchange and commodity markets observed after the referendum are minimal. More serious repercussions on economic activity could materialize in the coming months if there were to be a sharp decline in activity in the UK, which could be transmitted to Italy via trade or a cutback in the investment plans of firms active on the British market. These channels could have a perceptible but limited effect on GDP. In this case, and considering the latest data for the second quarter of 2016, growth could come to slightly less than 1 per cent this year and about 1 per cent in the next.
… but risks that have to be countered
Years of global crisis suggest that the risks could mount rapidly and considerably, with major repercussions on Europe’s and Italy’s economies if financial market tensions spread and were not countered by decisive use of the economic policy tools available, if banking tensions emerged and no prompt action were taken to safeguard financial stability, or if business and household confidence were substantially undermined. These risks can be warded off by a resolute monetary, macroprudential and fiscal policy response and by the European authorities’ success in dispelling the fears for the cohesion of the Union.
