Growth in the world economy strengthens but risks persist
Global economic recovery is gaining strength. The acceleration of investment in most of the economies is driving world trade, which has been picking up rapidly since the end of 2016. The volatility of the financial markets is very low. However, there is a high level of uncertainty about economic policies at the global level, which could have negative repercussions on investors’ assessments. In the United States the timing and composition of the fiscal stimulus measures announced at the start of the year have not yet been decided. Possible protectionist measures could hamper international trade.
Long-term interest rates remain low
After recording a general decline in the spring, yields on government bonds in the advanced countries have picked up since the last week in June, albeit remaining low, partly reflecting firmer expectations of less accommodative monetary conditions in the United States and the strengthening of economic activity in the euro area. Sovereign risk spreads narrowed in the euro area, partly owing to the results of the French election.
Growth consolidates in the euro area but inflation remains weak
In the euro area the latest indications are mixed: the positive signs of economic growth were more marked, while inflation surprisingly fell below the expectations of the last few months. The ECB Governing Council believes that a substantial degree of monetary accommodation is still needed to secure a sustained adjustment of inflation towards its aim.
In Italy economic activity gathers momentum …
Our estimates show that in Italy GDP growth, which was revised upwards by Istat in the first quarter, continued, settling at around 0.4 per cent in the second. GDP appears to have benefited from the positive trend in the services sector, in line with the indications given by firms, and from the recovery of valued added in industry, following the brief dip recorded at the start of the year.
… and investment strengthens
In the Bank of Italy’s surveys, firms said they are more optimistic about the general economic situation; their assessments of investment conditions improved for all sectors. The respondents also indicated that capital investment, weaker in the first quarter, appears to have recovered in the second, pointing to an acceleration in the second half of 2017. The latest economic data are also consistent with the continuing growth in household spending in recent months.
The current account surplus reduces the net international debtor position
In the first part of the year exports continued to expand, particularly to non-EU markets. The outlook for foreign orders remains positive. The balance of payments current account surplus remains high (at 2.6 per cent of GDP) and contributes to the marked reduction of Italy’s net international debtor position, which fell to 13.5 per cent of GDP.
Employment increases
In the first quarter employment and the number of hours worked continued to grow, despite the ending of the incentives to hire new staff on permanent contracts. Preliminary data from Istat’s labour force survey suggest that the number of persons employed rose further in April and May, by 0.2 per cent on average compared with the previous two months. In the winter, private sector contractual earnings increased modestly (0.5 per cent compared with a year earlier); gross wages and salaries grew at a faster pace, in line with the improvement in economic conditions.
Inflation rises but the underlying component remains weak
In the second quarter consumer price inflation in Italy rose slightly on average, largely reflecting the acceleration in regulated energy prices. In June, however, it was still only just above 1 per cent, according to the flash estimate. The core component also continued to be low. Households and firms raised their inflation expectations, but do not anticipate significant strengthening in the next twelve months compared with current levels.
Modest credit growth continues
The growth in lending to the non-financial private sector was driven by the expansion in loans to households. The rates of growth in corporate lending remained differentiated according to firm size and sector of economic activity. The rate was higher in services, slightly positive for manufacturing firms and remained negative for construction firms. Credit quality continued to improve, thanks to the more favourable economic conditions. The stock of non-performing loans fell; for the banking groups classified as significant, the coverage ratio was 52.8 per cent at the end of the first quarter, about 8 percentage points higher than the average for the leading European banks.
Measures are taken to resolve the crises of some banks
On 25 June the Italian authorities, in full agree-ment with the European authorities, began the orderly liquidation of Banca Popolare di Vicenza and Veneto Banca with government support. The liquidation was carried out in such a way as to ensure the continuity of existing business relationships and to limit the effects on the economy. Shareholders and junior bondholders participated in the losses, but no bail-in was used, which would have included senior bondholders as well as customers with deposits above €100,000; provision has also been made for compensating some retail junior bondholders. On 4 July the procedure for MPS’s access to precautionary recapitalization was completed, in full compliance with the European rules.
The projections indicate that growth is strengthening in Italy …
Based on the projections presented in this bulletin, Italy’s GDP should increase by 1.4 per cent this year, 1.3 per cent next year and 1.2 per cent in 2019. Compared with last January’s projections, growth has been revised significantly upwards, reflecting the acceleration of economic activity since the start of the year and the favourable developments in foreign demand and in the energy commodity markets. Investment not including construction will grow faster than GDP thanks to favourable financial conditions and tax incentives. Consumer price inflation will remain low at 1.4 per cent this year, 1.1 per cent next year, and rise to 1.6 per cent in 2019, in response to a moderate acceleration in earnings.
… reflecting expansionary monetary conditions
This macroeconomic sce-nario incorporates market expectations of a gradual adjustment of long-term interest rates and generally relaxed credit conditions, in keeping with the assumption that there will be no particular tensions in the financial system or any episodes involving significantly higher volatility or higher risk premiums.
Downside risks remain
These growth projections are subject to mainly downside risks: in addition to the uncertainties linked to the financial markets there are those connected with future global economic and trade policies. Downside risks to inflation could stem from slower than projected wage growth, while the evolution of energy commodity prices in the near future continues to be highly uncertain.
