World trade picks up but downside risks persist
The prospects of a global recovery are gaining ground, driven in part by expansionary policies in the main economic areas; the pace of international trade has accelerated, benefiting from increased investment in many countries. However, there are still considerable risks stemming from persistent uncertainty surrounding the future stance of economic policies: the fiscal stimulus package in the US has yet to be defined and possible adverse effects of protectionist measures on international trade cannot be ruled out.
Optimism on the financial markets increases but uncertainty over policies also rises
Financial market conditions suggest optimism about stronger international growth; share indices have risen in all the main advanced economies, including in the banking sector. There has been a resumption of net capital inflows to emerging economies, where financial conditions have generally improved. However, the indices gauging levels of uncertainty about economic policies are at exceptionally high levels; this could have adverse repercussions on investors’ assessments and on the volatility of stock markets, posing risks to the broader economic outlook.
Long-term yields rise in the euro area
Long-term interest rates rose in the euro area, driven by expectations of better cyclical conditions, but also by higher sovereign spreads, which have been hit by deepening uncertainty.
A very substantial degree of monetary accommodation is still needed
Growth strengthened in the euro area. Inflation rose, averaging 1.7 per cent in the first three months of the year. The increase, however, is attributable to the most volatile components – food and energy prices; it has not yet led to any upward revision of inflation expectations beyond the current year, as prospects for wage growth are still weak in many countries. The Governing Council of the ECB confirmed that a very substantial degree of monetary accommodation is still needed and that it would keep its key interest rates at present levels or lower for an extended period of time, and well past the horizon of its net asset purchases.
In Italy the recovery is proceeding at a moderate pace
The latest available indicators signal that in the first three months of the year the Italian economy continued to expand, gaining around 0.2 per cent compared with the previous quarter, though with downside risks. The expansion of activity in services more than offset the weakening trend in manufacturing, signalled by industrial production data in the two months January-February and the most recent information on goods transport and electricity consumption. In the Bank of Italy’s survey conducted in March, firms’ assessments of the general state of the economy improved. Intentions regarding investment plans were also generally favourable: the percentage of firms planning to increase investment expenditure in 2017 is 14 percentage points greater than that expecting to decrease it.
Exports expand, boosting the current account surplus
The brighter global and European outlook benefited Italy’s foreign trade. Exports rose, driven above all by the expansion of EU markets; surveys suggest that the prospects for foreign orders are also favourable. The current account surplus reached 2.6 per cent of GDP in 2016, providing an important contribution to the rebalancing of Italy’s negative net international investment position, which fell to 14.9 per cent of output (from 25.3 per cent at the end of 2013).
In the fourth quarter of 2016 the number of persons in employment (which had stalled in the previous quarter), and total hours worked both recorded increases. Overall, the number of those employed expanded by 2.7 per cent in the last three years, though this was still 1.3 per cent below the level recorded at the outbreak of the global crisis. In the same period, the number of hours worked rose by 3.4 per cent; during the recession they had fallen markedly as a result of increased recourse to wage supplementation, lower overtime payments, and the shift in employment towards short-time contracts. Hours worked still remain about 5 per cent below what they were at the end of 2008. The latest cyclical indicators suggest that employment will continue to recover in the early part of 2017. The unemployment rate declined to 11.7 per cent on average for the first two months of this year.
The cost of labour registers modest growth
In the closing months of 2016 the cost of labour increased moderately for the economy as a whole, while in industry excluding construction it fell for the fourth consecutive quarter. Wage agreements stipulated during recent contractual renewals, which include indexation mechanisms linking pay increases to past, rather than expected, inflation, point to continuing slow wage growth in the future.
So far the rise in inflation has not extended to core items
As in the euro area, consumer price inflation also accelerated in Italy. In the first quarter it rose to an average of 1.3 per cent, the highest level recorded in the last four years. Excluding the most volatile components, however, it was still low at around 0.5 per cent; this reflected still ample margins of labour underutilization and spare production capacity, as well as persistently slow wage growth. According to the surveys, the inflation expectations of households and firms have been revised upwards, but remain moderate overall.
Growth in lending strengthens
Growth in private-sector lending continued into the early months of this year and strengthened for households; it is still, however, highly uneven across the various sectors of activity and categories of firm. The pace of lending is increasing sharply in services, remains slightly negative in manufacturing, and continues to contract in construction. Survey results suggest that supply conditions remain accommodative. Credit quality continues to improve gradually, reflecting the strengthening cyclical outlook. Italian banks’ share prices staged a recovery, in part benefiting from the very positive outcome of a number of recapitalizations.
The Government outlines the 2017 Economic and Financial Document
General government net borrowing declined from 2.7 per cent of GDP in 2015 to 2.4 per cent last year; the ratio of debt to GDP increased by around half a percentage point to 132.6 per cent. On 11 April the Government approved the 2017 Economic and Financial Document. The objective for net borrowing in 2017 was revised down from 2.3 to 2.1 per cent of GDP. This result will be achieved thanks to the additional measures defined after discussions with the European authorities. In 2017 the ratio of debt to GDP is expected to remain basically unchanged at the level recorded last year. In the coming weeks the European Commission will assess Italy’s fiscal position.