Risks for the world economy persist
The risks for the world economic outlook stemming from the ongoing international trade tensions and from the slowdown of economic activity in China have not subsided. Long-term yields have declined in the advanced countries, affected by the poorer growth prospects and by the more accommodative stance of the main central banks: the Federal Reserve has indicated the possibility of future reductions in interest rates.
The ECB considers all the tools at its disposal
Economic activity in the euro area remains weak and prone to downward risks, and inflation is still at low levels. The ECB Governing Council has extended the time horizon over which it expects to keep interest rates low and has set out the details of a new series of refinancing operations (TLTRO III). It announced that, in the absence of improvements, additional stimulus will be required, and discussed the options that could be used.
In Italy, the weak industrial cycle curbs economic activity …
According to the latest cyclical indicators, economic activity in Italy may have remained unchanged or decreased slightly in the second quarter. The main contributory factor is the weak industrial cycle, common to Germany too, caused by persisting trade tensions. The Bank of Italy's surveys show that firms' assessments of demand for their own products have improved slightly; however, they point to a slowdown over the next few months and indicate a very modest growth in planned investment for the current year.
… while exports grow, despite a backdrop of uncertainty
Despite the contraction in international trade, exports grew moderately in the first four months of the year. Uncertainty over developments in the global context is nevertheless reflected in firms' unfavourable assessments of the outlook for foreign orders. However, the current account surplus has widened again; Italy's negative net international investment position is close to balance. Foreign investors have been purchasing Italian government securities since the beginning of the year and the Bank of Italy's negative balance on the TARGET2 payment system has narrowed.
Cyclical weakness keeps price dynamics down
The slowdown in the prices of energy products and the weak economic cycle are curbing inflation, which decreased to 0.8 per cent in June (0.4 per cent excluding the food and energy components). According to the surveys, firms and households' inflation expectations remain subdued, even if they have been revised slightly upwards.
The evolution of the uncertainty over budget policy has affected the yield spread between Italian and German government bonds, which increased in May and decreased from the first week of June onwards. Contributory factors to this fall, at a time of a generalized decline in risk premiums due to the prospect of monetary accommodation, were the revision of the deficit forecast for this year and the resulting decision by the European Commission not to recommend the launch of an excessive deficit procedure against Italy. However, the yield spread between ten-year Italian government bonds and the corresponding German Bund remains higher than the level prevailing in April 2018.
Loans to firms decrease
Bank lending to the private sector weakened slightly; growth in loans to households remained solid, while lending to firms contracted slightly. Last year's increase in banks' bond funding costs has so far had little effect on the interest rates applied to loans, in part thanks to the high level of liquidity and the improvement in banks' balance sheets; nevertheless, credit access conditions tightened for smaller firms.
The update of the projections for Italy …
The macroeconomic projections for the Italian economy for 2019-21 presented in this Bulletin update those prepared as part of the Eurosystem's forecasting exercise, which was based on the information available on 22 May.
The projections assume a scenario of weaker world trade, persisting trade tensions, a very accommodative monetary stance (consistently with the communication of the ECB Governing Council) and sovereign spreads that are still high (and are gradually passed through to private sector borrowing conditions).
… includes a slowdown in 2019 and a recovery in the two years 2020-21 …
The central projection for GDP growth is 0.1 per cent this year, 0.8 per cent next year and 1.0 per cent in 2021. The scenario indicates a slowdown in investment, in line with the findings of our business surveys and with the gradual increase in borrowing costs; exports are projected to be affected by the deceleration in world trade, although Italian firms maintain their market shares. From the second half of this year, economic activity should gradually recover, thanks above all to household spending and exports. Inflation is expected to fall to 0.7 per cent in 2019, and then progressively strengthen owing to the gradual recovery driven by core inflation.
… though it is subject to international and domestic risks
This scenario is subject to risks for growth. Continued tensions over trade policies, by curbing exports and adversely affecting firms' propensity to invest, would undermine the recovery in economic activity projected for the second half of 2019 in Italy and the euro area. On the domestic side, a heightened uncertainty about budget policy from next year on could generate new turbulence in the financial markets and influence firms' investment plans; a virtuous circle between fiscal policy and financial conditions could instead boost economic activity. Inflation risks, stemming on the one hand from increases in energy prices, and on the other from weak economic activity, are balanced overall.
