The global economy remains strong
Global economic growth remains strong and wide-spread, however, inflation is still weak overall. The short-term outlook is favourable.
Euro-area growth strengthens; inflation is weak
In the euro area the outlook for growth improved further. Based on the December Eurosystem staff projections, euro-area GDP is expected to grow by 2.3 per cent this year. Deflation expectations have dissipated, but inflation remains low, standing at 1.4 percent in December; core inflation continues to be weak, curbed by still modest wage growth in many euro-area economies. The ECB Governing Council recalibrated its monetary policy instruments, however it expects monetary conditions to remain very accommodative into the future, as this is necessary to secure a sustained return of inflation rates towards levels that are below, but close to, 2 per cent.
The expansion of the Italian economy firms up
According to our estimates, in the fourth quarter of last year Italian GDP rose by around 0.4 per cent, confirming the positive trend of recent quarters, although it is still below the euro-area average. The increase was seen in both services and industry excluding construction. Business surveys confirm that confidence is returning to the levels recorded before the recession; conditions are also favourable for capital formation, confirmed by the acceleration in investment expenditure observed in the second half of the year.
Exports grew and the current account surplus remains large
Exports expanded in the third quarter of 2017; firms' assessments of foreign orders are favourable. The current account surplus remains large, equal to 2.8 per cent of GDP over the four quarters ending in September; the surplus contributes to the improvement in Italy's debtor position, which fell to 7.8 per cent of GDP.
Employment continued to rise in the third quarter and, according to the most recent economic indicators, in the final months of the year. The number of hours worked also increased, although it remains below pre-crisis levels. According to the labour force survey, the unemployment rate stood at 11 per cent in November. Wage growth remains moderate but, based on the labour contracts renewed in the second half of the year, shows some signs of a recovery.
Inflation is still moderate
Despite a recovery in producer prices, consumer price inflation in Italy remains weak, at 1.0 per cent in December; core inflation is particularly low, at 0.5 per cent. According to the surveys, firms' inflation expectations are subdued, but stand above the low levels recorded at the end of 2016. The firms interviewed expect to increase their list prices by just above 1 per cent this year.
Lending to the private sector continues to grow …
The expansion in lending to households is strong; lending to firms, especially manufacturing firms, is also growing. Firms' demand for bank loans was limited by the ample availability of internal funds and greater recourse to bond issues.
… and credit quality improves further
Credit quality continued to improve, bolstered by the firming economic recovery. The ratio of new non-performing loans to outstanding loans fell to 1.7 per cent, below the levels recorded before the global crisis. The share of non-performing loans to total loans declined (for the groups classified as significant for supervisory purposes, it fell from 8.2 per cent to 7.8 per cent net of loan loss provisions), largely on account of the completion of transactions for the sale of bad loans. Banks' capital ratios have strengthened.
The projections indicate continued growth in Italy …
This Economic Bulletin presents projections for the Italian economy for the three years 2018-20. It is estimated that GDP adjusted for calendar effects expanded by 1.5 per cent in 2017 (1.4 per cent excluding this adjustment); it is expected to increase by 1.4 per cent in the current year and by 1.2 per cent in 2019-20. Economic activity is expected to be mainly driven by domestic demand.
… and a modest recovery in inflation …
Inflation is expected to dip temporarily this year, before gradually climbing back up again. The drop expected in 2018 (to 1.1 per cent on average for the year) is mostly attributable to the automatic waning of the effect of the increase in the prices of energy and food products registered in early 2017. Over the next two year prices are expected to increase by a yearly average of 1.5 per cent, reflecting stronger growth in wages.
… driven by economic policies
The forecasting scenario assumes that financial conditions continue to be accommodating, with a very gradual adjustment in short- and long-term interest rates, orderly conditions on the government securities markets, and relatively relaxed credit supply conditions. Overall, GDP performance is expected to continue to depend on the support provided by economic policies, albeit to a lesser extent than in the past.
The risks stem from the global economy
The main risks associated with these projections stem from global conditions and from the performance of the financial markets. An intensification of geopolitical tensions or greater uncertainty surrounding the future course of international economic policies could translate into higher volatility in the financial markets and in risk premiums, with adverse repercussions on the euro-area economy.
Among domestic risks, those connected with the weakness of the banking system and with the potential heightening of uncertainty on the part of households and firms over the strength of the recovery under way have abated compared with past quarters. This scenario, however, relies on the continuation of economic policies capable of fostering long-term economic growth by supporting investment and consumption choices, while also lending credibility to public debt reduction objectives by fully exploiting the upturn in the global economy.