Economic Bulletin No. 1 - 2019

The prospects for world trade are weaker

The global economy has continued to grow in recent months, but signs have emerged of a deterioration in cyclical conditions in many advanced and emerging economies. The prospects for world trade continued to weaken after the slowdown in the first part of last year. The uncertainties over economic conditions have had repercussions on the international financial markets, lowering long-term interest rates and share prices. The risk factors weighing on global economic prospects include the possible repercussions of a negative outcome to the trade negotiations between the United States and China, the worsening of financial tensions in the emerging economies and the arrangements for the United Kingdom's withdrawal from the European Union.

The ECB Governing Council confirms that it will maintain ample monetary stimulus

In the euro area, economic activity grew at a slower pace; in November industrial production fell sharply in Germany, France and Italy. Inflation decreased as a result of the deceleration in energy prices, though it was still firmly in positive territory. The ECB Governing Council confirmed its intention to maintain ample monetary stimulus for an extended period of time.

In Italy, economic activity continues to be weak

In Italy, the available cyclical indicators point to a possible decline in economic activity in the last three months of the year after the interruption in growth in the third quarter. The decline in the summer months was partly attributable to the fall in domestic demand, especially investment, and to a slight reduction in household spending. The survey carried out by the Bank of Italy in collaboration with Il Sole 24 Ore points to a slowdown in investments planned by industrial and service firms owing to the uncertainty surrounding political and economic factors and trade tensions.

The current account surplus remains large

The performance of Italian exports remained favourable in the second half of the year. However, the slowdown in global trade influenced firms' assessments of foreign orders. The current account surplus remained large and Italy's net international debtor position continued to improve, narrowing to just over 3 per cent of GDP at the end of September.

The number of hours worked rises, but not the number of persons employed; wages continue to grow moderately

In the third quarter, the number of hours worked increased while the number of persons employed fell slightly; according to preliminary data, the number of persons employed remained essentially unchanged in the fourth quarter. The growth in contractual wages continued across all sectors.

Inflation falls and the core component remains weak

Consumer price inflation fell to 1.2 per cent in December, largely on account of slower growth in energy prices. Core inflation remained weak, standing at 0.5 per cent. Firms revised downwards their inflation expectations.

Developments on the government bond market are favourable…

Sovereign risk premiums have fallen on account of the agreement reached between the Italian Government and the European Commission regarding Italy's budget policies. The spread between Italian and German ten-year bonds stood at around 260 basis points in mid-January, 65 points below the peak registered in mid-November. Nonetheless, financial market conditions remain tenser than at the start of the summer.

…as are those on bank CDS premiums

The share prices of credit institutions declined by an average of 14 per cent from the end of September, reflecting, as in the euro area as a whole, a weaker growth outlook. However, CDS premiums for debt instruments in the banking sector have fallen since the end of 2018 on account of the easing in the tensions regarding government bonds. In mid-January, the CDS premiums of the main Italian banks were 40 basis points lower than the values recorded in mid-November.

Credit standards remain relaxed; the stock of NPLs declines

Supply conditions remain relaxed overall; interest rates on loans increased slightly compared with May, before the emergence of tensions on the government bond market. However, persistently higher yields on government bonds and rising bank funding costs would increase the cost of credit. In the latest business surveys, firms indicated a tightening in credit access conditions.

The ratio of NPLs to total outstanding loans continued to diminish, reaching 4.5 per cent net of loan loss provisions in the third quarter, 1.8 points less than the year-earlier period. The ratio of new non-performing loans to outstanding loans also remained low, standing at 1.7 per cent on a seasonally adjusted, annualized basis.

The budgetary plan will increase the deficit

The budget will increase the deficit in the three years 2019-21 with respect to the current legislation projections. According to official estimates, net borrowing is expected to stand at 2.0 per cent of GDP in 2019, interrupting the decline underway since 2014. In the light of the changes made to the draft budget, which in its original version would have increased the deficit for 2019 to 2.4 per cent of GDP, the European Commission decided not to launch an excessive deficit procedure against Italy at this stage.

The projections indicate a slowdown in growth for 2019

This Economic Bulletin presents the macroeconomic projections for the Italian economy for the three years 2019-21. The projections update those prepared as part of the Eurosystem staff macroeconomic projections, which were based on information available on 27 November.

The central projection for GDP growth is 0.6 per cent this year, 0.4 points lower than the previous projection. The downward revision was on account of three main considerations: new information pointing to a sharper cyclical slowdown in the last part of 2018, which reduced the carry-over effect on growth by 0.2 points; the cutback in firms' investment plans, as confirmed by recent surveys; and the expected slowdown in global trade. The agreement reached between the Government and the European Commission has had moderately positive effects on growth: the positive stimulus provided by the lower long-term interest rates will amply compensate the direct effects of the revision in the budgetary measures. In the two years 2020-21, the central projection for growth is 0.9 and 1.0 per cent respectively. These are the central values of a probability distribution which has a particularly large dispersion.

Inflation is expected to increase gradually, from 1.0 per cent in 2019 to 1.5 per cent on average in the next two years, following an acceleration in private sector wages and a gradual alignment in inflation expectations.

The risks to growth are downside

In addition to the global factors fuelling uncertainty, downside risks to growth also stem from the possibility of renewed increases in interest rates on government bonds, of a faster deterioration in private sector borrowing conditions and of a sharper drop in firms' propensity to invest. On the other hand, the growth rate might actually exceed this projected scenario if sovereign spreads diminish further.

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