Economic Bulletin No. 1 - 2017

Global growth prospects are clouded by uncertainty over economic policies

Worldwide economic conditions have improved slightly, though a number of uncertainties continue to weigh on the outlook. Prospects for the United States will depend on the economic policies enacted by the new administration, which have yet to be worked out in detail. The fiscal policy measures announced could have an expansionary effect, which is difficult to quantify at present, while the imposition and spread of restrictions on trade could have a negative impact. Global growth could be held back by any turbulence in the emerging economies associated with the normalization of US monetary policy.

Long-term yields are rising in the global markets

Following the presidential elections, expectations in the financial markets of an expansionary fiscal policy and higher inflation in the United States have triggered a shift in portfolios from bonds to equity. Long-term yields have also risen in the other advanced economies, but only to a limited extent owing to the divergence of monetary policies. Capital outflows from emerging economies have resumed.

The ECB Governing Council has extended its asset purchase programme to ensure conditions remain expansionary

Growth in the euro area continues at a moderate though gradually strengthening pace. The risks of deflation have largely sub-sided; inflation turned up-wards again in December but core inflation is still at low levels. With a view to maintaining the expansionary monetary conditions necessary to ensure inflation continues on an upward path, the ECB Governing Council has extended its asset purchase programme until the end of December 2017, or beyond, if necessary. From April 2017 purchases will continue at a monthly rate of €60 billion, as in the initial phase of the programme.

Italy’s economy continues to record moderate growth…

The latest available indi-cators suggest that the Italian economy continued to recover in the autumn, though at a slow pace. Considering the performance of industrial production, electricity consumption and freight transport, which all recorded growth, and business confidence indicators, which are at high levels, GDP is estimated to have risen by around 0.2 per cent in the fourth quarter of 2016 compared with the third.

...driven by domestic demand

Economic activity was stimulated by the revival of investment and the expansion of household expenditure. Signs of consolidation in the construction sector, and in the residential property segment in particular, have been confirmed. The downward trend in the consumer confidence index, under way since the beginning of the year, was interrupted in December.

Households diversify their portfolios

The Bank of Italy’s debtor position on TARGET2 was practically unchanged in the last quarter of 2016, reaching €357 billion at the end of December. Considering data on the balance of payments (available to November), the progressive widening of the balance between January and November can be attributed above all to the diversification of Italian households’ portfolios towards asset management services and insurance products – which reflect investment policies that are less biased towards national assets – and to the decline in bank funding on international markets, coinciding with liquidity creation through the Eurosystem programmes. The current account surplus recorded a further improvement.

Payroll employment rises

In the third quarter of 2016 total employment stabilized and both fixed-term and open-ended payroll jobs increased. The latest cyclical indicators are consistent with a small expansion in employment in the closing months of 2016. Over the course of the year the pace of wage growth in the private sector slowed sharply, affected both by delays in many contract renewals and the absence of pay increments for 2016; the virtual freezing of contractual wages affected around half of all payroll workers.

Lending grows at a slow pace

Lending to the non-financial private sector has continued to expand in recent months, as has business lending, though the pace of growth is still slow. The credit quality of Italy’s banks has continued to benefit from the brighter cyclical outlook, with the ratio of new non-performing to outstanding loans declining further.

Share prices rise; sovereign spreads remain high

The risk premiums onItalian government securities, which had risen in the autumn, remained high. In the final part of the year share prices rallied; the recovery in Italian banks’ share prices came before the introduction of government measures to support banks’ liquidity and capitalization, already partly priced in by market operators.

The Government approves measures to support the banking system

The Government has authorized the funding of possible measures to support Italy’s banks and banking groups, which would take the form of capital injections or guarantees on newly issued liabilities, for up to a maximum of €20 billion; it will proceed with the precautionary recapitalization requested by Banca Monte dei Paschi di Siena, in compliance with European regulations on bank recovery and resolution and on State aid.

The projections are for continued growth …

The projections for the Italian economy, updated to take account of the most recent developments and adjusted for working days, indicate that GDP rose by 0.9 per cent on average in 2016 and will expand at around the same pace this year too, before rising to 1.1 per cent in 2018 and in 2019. Output should continue to be driven by national demand and, from as early as this year, also by the gradual strengthening of foreign demand. In 2019 output is expected to still be about 4 percentage points below what it was in 2007.

… assuming that credit conditions remain relaxed and Italy presses on with its reform agenda

The forecasting scenario assumes that long-term yields will remain low and credit standards generally relaxed, both in terms of cost and availability. This in turn assumes that conditions in the financial and banking markets in the euro area and in Italy will continue to be broadly relaxed and that risk premiums and volatility will experience no significant surge; it also reflects the assumption, incorporated in market prices, that Italy will press on with its reform agenda of recent years.

Risks to growth stem from the global situation

Overall, it can be estimated that the risks to growth with respect to these projections remain pri-marily on the downside. The main factors of uncertainty, aside from financial conditions, stem from the global situation. In contrast to the main assumptions underpinning the projections, there is a particularly high risk that the recovery of the world economy could be affected by the emergence and spread of protectionism, as well as possible turmoil in the emerging economies.

Risks to inflation are balanced

The recent agreements on production cuts among the largest oil producing countries could translate into higher than expected increases in consumer prices, especially this year. Downside risks to the inflation projections instead come from trends in private sector wage growth.

Full text