Economic Bulletin No. 1 - 2020

World trade returns to growth, but global risks remain on the downside

The risks to global growth remain tilted to the downside. International trade has returned to growth and there have been signs that the tariff disputes between the United States and China have eased, but the outlook remains uncertain and geopolitical tensions are on the increase. Less pessimistic growth expectations, buoyed by the accommodative stance of the central banks, have nonetheless driven up share prices and have facilitated a moderate recovery in long-term yields.

Monetary accommodation is still necessary in the euro area

Economic activity in the euro area has been held back by the weakness of the manufacturing sector; particularly so in Germany despite a better-than-expected performance there in November. While growth in the service sector has been stronger up until now, there is the risk that it could also be affected. Developments in the economy have an impact on inflation, which according to Eurosystem projections is being sustained by monetary stimulus but is expected to remain below 2 per cent over the next three years. The ECB Governing Council has reaffirmed the need to maintain its current accommodative stance.

In Italy the industrial cycle held back GDP, while orders are stabilizing

The latest available data suggest that economic activity in Italy, which expanded slightly in the third quarter of last year, remained more or less unchanged in the fourth quarter and continued to be affected above all by the weakness of the manufacturing sector. In the surveys conducted by Istat and the Bank of Italy, firms have expressed slightly more favourable assessments of orders and foreign demand, but continue to view uncertainty and trade tensions as factors hindering their activity. Firms are planning to increase investment in 2020, albeit to a lesser extent than in the previous year.

Inflows of capital from abroad continue

In recent months, there has been substantial net foreign investment in Italian public securities (€90 billion between January and November 2019). The Bank of Italy's negative balance on the TARGET2 European payment system has improved significantly, owing in part to the effect of the increase in net funding for Italian banks from abroad on the repo markets, facilitated by the introduction of the new remuneration system for banks' reserves held with the Eurosystem. In 2019, the current account surplus remained large. Italy's net international investment position is close to balance.

Employment has risen

In the third quarter, the number of people in employment rose slightly, especially in the service sector; the data available point to an expansion in recent months as well. Contractual wage growth is positive (0.7 per cent year-on-year), although it is diminishing, reflecting the fact that significant sectors of the economy are still waiting for the renewal of collective bargaining agreements.

Inflation increases but remains very low

Inflation is low (0.5 per cent in December). The service sector is the biggest contributor to price growth, while growth in the prices of industrial goods remains modest. Core inflation strengthened slightly in the autumn, rising to 0.7 per cent. The latest business surveys registered a slight reduction in inflation expectations.

Sovereign yields and share prices increase

Italian government bond yields and Italian share prices have been rising since mid-October, reflecting a similar trend in other euro-area countries, as well as the publication of some better-than-expected economic data for the euro area. Average yields on bonds issued by Italian non-financial corporations and banks remained substantially unchanged at more than 70 basis points below the average levels recorded in the first half of 2019.

The cost of lending decreases

The cost of credit has fallen, considerably so for households, for whom growth in lending remains solid, while it is negative for firms. Based on the surveys, this mainly reflects weak demand for loans. According to the banks, the measures adopted in September by the ECB Governing Council will help bring about an improvement in credit conditions.

The ratio of net borrowing to GDP falls slightly

The preliminary data available for 2019 indicate a slight reduction in the ratio of general government net borrowing to GDP and an increase in the debt-to-GDP ratio. The budgetary provisions for the three years 2020-22, approved by Parliament last December, increase net borrowing by 0.7 percentage points of GDP on average per year compared with its current-legislation levels. After stabilizing in 2020, the Government's plans indicate that net borrowing and debt will decline in 2021 and 2022 as a percentage of GDP.

The projections for Italy …

This Bulletin includes the macroeconomic projections for the Italian economy in the three years 2020-22, which update those prepared in December as part of the Eurosystem staff macroeconomic projection exercise.

… conditional on a gradual global recovery and accommodative monetary conditions …

The projections assume: modest growth in world trade, although a gradual recovery is expected; accommodative monetary conditions, in line with the stance confirmed by the ECB Governing Council; and orderly developments in Italian financial markets, which translate into low credit costs for firms.

… indicate a return to moderate growth ...

Based on these assumptions, the central projection indicates an increase of 0.5 per cent in GDP this year, of 0.9 per cent in 2021 and of 1.1 per cent in 2022. Economic activity is expected to be supported both by the gradual upturn in world trade and by moderate growth in domestic demand. Despite being affected by persistent uncertainty, investment is likely to be boosted by the gradual improvement in the outlook for global demand and by expansionary financing conditions; the decline in sovereign spreads observed since the beginning of last June is expected to support investment by about 3.5 percentage points overall in the three years 2020-22. Inflation will rise gradually, by 0.7 per cent in the current year to 1.3 per cent in 2022, above all thanks to a recovery in wages and profit margins, which are expected to benefit from the improved cyclical situation.

Compared with last July's projections, growth is predicted to be lower this year and essentially unchanged for 2021. The effects of the more pronounced weakness of the global economy are largely offset by those of the greater monetary stimulus and of lower risk premiums on Italian sovereign debt.

… but significant risks remain

Growth is still exposed to considerable risks, linked to increasing geopolitical uncertainty, trade conflicts that have only been partly resolved and the weak economic performance of our main European partners. Any delay in implementing the large increases in planned public investment, which have been incorporated in the forecasting scenario, or a renewal of tensions on the financial markets, could lead to growth being lower than projected.

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