Rapporto Ocse Su Italia - Marzo 2009

OECD ECONOMIC OUTLOOK

INTERIM REPORT

ITALY

The recession is projected to deepen in 2009 as investment falls sharply, export markets contract and uncertainty dampens consumer expenditure. Italy’s open economy and export product mix expose it to the full force of recession in other countries. The recovery is likely to be slow and unemployment will rise steeply this year and into 2010. Inflation will fall to near zero by the end of next year. The budget deficit will widen sharply reaching nearly 5% of GDP this year and 6% in 2010. The high level of public debt and fears that it might be difficult to roll over have rightly restrained discretionary fiscal action. Improved spending control and efficiency are needed to improve Italy’s creditworthiness. Meanwhile, re-targeting spending to widen support for the unemployed and their families will be more effective in sustaining demand than support to individual industries or attempts to direct bank lending. The output decline has accelerated

The economy weakened during 2008 and the pace of decline is accelerating. Exports are falling steeply, as Italy‟s specialisation in luxury products, consumer durables and investment goods exposes it to the full force of recession in partner countries. Investment demand has also fallen sharply, and consumer expenditure, especially on cars and durables, is weak, even if car registrations may have ticked up slightly in February. Italy

Source: OECD, Main Economic Indicators database.

83

OECD ECONOMIC OUTLOOK The labour market is weakening and inflation has declined

INTERIM REPORT

Unemployment began to rise in 2007, even though overall employment was increasing through the first three quarters of 2008. Wage growth increased in 2008, with a large number of national settlements being renewed, but price inflation slowed significantly as energy-related costs came down. The budget deficit rose last year, partly because of the slightly expansionary budget for 2008, though remaining under 3% of GDP. Italy: Demand, output and prices 2005 Current prices € billion

Private consumption1 Government consumption Gross fixed investment Machinery and equipment Construction Residential Non-residential

2006

2007

2008

2009

2010

Percentage changes, volume (2000 prices)

844.0 290.8 296.7 142.2 154.4 69.9 84.5

1.3 0.5 3.2 5.4 1.1 4.1 -1.3

1.2 1.0 1.6 2.4 0.8 1.1 0.6

-0.9 0.6 -2.9 -4.1 -1.8 -0.9 -2.7

-3.0 0.3 -11.7 -13.7 -9.9 -7.1 -12.4

0.0 0.2 -0.8 -0.9 -0.8 -0.8 -0.7

1 431.5 - 0.7 1 430.7

1.5 0.5 2.0

1.2 0.1 1.3

-1.0 -0.3 -1.3

-4.1 0.4 -3.8

-0.1 0.0 -0.2

371.4 372.2 - 0.9

6.5 6.2 0.1

4.0 3.3 0.2

-3.7 -4.5 0.2

-15.9 -13.8 -0.5

-1.1 -0.2 -0.2

1 429.9

2.1

1.5

-1.0

-4.3

-0.4

1.8

2.4

2.8

1.1

0.2

Harmonised index of consumer prices

2.2

2.0

3.5

0.7

0.7

Core harmonised index of consumer prices 3

1.6

1.8

2.2

1.7

0.7

Unemployment rate

6.8

6.2

6.8

9.2

10.7

-3.4 -3.3

-1.5 -3.1

-2.5 -6.9

-4.7 -4.0

-5.9 -1.4

Final domestic demand Stockbuilding2 Total domestic demand Exports of goods and services Imports of goods and services Net exports2 GDP at market prices GDP deflator Memorandum items

General government financial balance4 Export performance5

Note: National accounts are based on official chain-linked data. This introduces a discrepancy in the identity between real demand components and GDP. For further details see OECD Economic Outlook Sources and Methods (http://www.oecd.org/eco/sources-and-methods). 1. Final consumption in the domestic market by households. 2. Contributions to changes in real GDP, actual amount in the first column. 3. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco. 4. As a percentage of GDP. 5. Ratio between export volume and export market of total goods and services. Source: OECD.

Short term indicators point to further output falls

Indicators such as orders and producers‟ and consumers‟ expectations for the future all point to further declines in output. The stock of bank credit was still rising up to the end of 2008, but at a declining rate. The rate at which loan requests are being refused has increased significantly and the share of non-performing loans has begun to rise (though not for loans to households). Together with tight credit, poor trade prospects will further accentuate the decline in investment, which will recover only slowly ever when financial market conditions improve. Real income gains to

84

OECD ECONOMIC OUTLOOK

INTERIM REPORT

households from energy price falls may be substantial but rising unemployment and uncertainty is expected to generate more precautionary saving, limiting any recovery in consumption until 2010. Emergency bank recapitalisation facilities have not been needed…

Italian banks have up to now seemed less exposed to risky products than those of other large countries, both as originators and investors, partly due to conservative behaviour and also due to some regulatory caution on mortgage lending. However, the two largest banks (accounting for a third of total banking sector assets) have acquisitions in eastern European countries, in some of which problems are more severe. Despite what appears to be an overall favourable position, credit standards have been tightened much in line with those in other European countries, perhaps because capital ratios are low (in part due to conservative treatment of the definition of tier 1 capital by the regulator).

… although a voluntary facility was recently set up

The government set up an emergency recapitalisation facility in October for banks in severe difficulties. In late February the government announced a facility for injecting funds, in the form of bonds, to any bank wanting them. Terms include a commitment to maintain lending to small companies and a rate of interest which rises after the first year. No bank has yet taken up this facility.

Fiscal policy, starting from a weak position, has been restrained

Budget plans set last year for 2009 and 2010 included a substantial consolidation of the structural deficit, mainly through restricted spending growth, to reduce the high level of debt. Two subsequent sets of crisis measures, in November and February, have maintained this strategy though the weakening economy means the original targets are now well out of reach. Both sets of crisis measures made some changes to the pattern of spending, to focus more on poverty alleviation, but the net effect on the budget balance was designed to be near zero. The government has been concerned to improve credibility in the government bond market, as it needs to refinance some € 300 billion of public sector debt falling due in 2009. Thus, useful measures to cushion the effects of recession by widening eligibility for unemployment benefits and to support low-income families were offset by cuts in other spending.

There are limits to fiscal action

The government will need to focus on measures to anchor expectations for long-term budget consolidation, for example by accelerating or extending the pension reform process and pressing on with reforms to improve efficiency in public administration. Over the projection period the deficit widens substantially as the government should allow automatic stabilisers to work; with such high public debt, and so long as debt markets are nervous, not much more can be done. Recapitalising banks with equity could be considered as an alternative to loan capital.

85