Research Dept. News
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Monthly Report, num 285 - November 2005
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European Union - Italy
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Italy: political scene darkens recovery
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In Italy, following first signs of recovery in second quarter, third-quarter indicators confirm that economy now regaining strength, in spite of lack of drive in private consumption…
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The Italian economy is recovering. Macroeconomic figures for the second quarter show recovery, still indeed modest, of consumption, investment and exports. And indicators for the third quarter point to a continuation of recovery, as may be seen from the trend in industrial production (year-to-year growth of 1.6% in August, its highest level since May 2004) and the increase of more than five points in the economic sentiment indicator in the third quarter, to mention only two representative figures.
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The reduction in the unemployment rate in the second quarter to 7.7% (7.8% in the first quarter) and maintenance of inflation at 2.0% in August and September are other positive factors which should contribute to consolidate this new stage of economic growth.
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…while worsening of foreign sector also not helping.
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On the other hand, the lack of recovery in consumer confidence, stuck at the –21 points level all through the third quarter, and the poor performance in retail sales (these dropped by 2.1% year-to-year in July) make it clear that that the level of private consumption remains weak. Nor is the slowdown in exports very favourable with growth going from 6.4% in the second quarter to only 3.7% as the average for July and August. In any case, the overall balance continues to point to a higher rate of economic activity in coming months, as is underlined, for example, by the fact that the composite index of early indicators put out by the Organization for Economic Cooperation and Development (OECD) for August stood at its highest level since the beginning of 2004.
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Nevertheless, this better economic drive has been left in second place in view of events at the political level. Just as parliament was about to approve the budget, the main instrument of economic policy, Minister of Economy Doménico Siniscalco resigned on September 22. More than because he had lost his battle to obtain the resignation of the chairman of the Bank of Italy, Antonio Fazio, in face of the polemical position Fazio had adopted regarding the take-overs of the Antonveneta and Nazionale del Lavoro banks, the real cause was political differences maintained by Siniscalco on the budget.
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But current economic situation takes second place in view of complications of Italy’s broad economic picture, along with resignation of Minister of Economy Siniscalco as budget about to be approved and appointment of Tremonti in his place, all pointing to adoption of unambitious budget.
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His replacement, Giulio Tremonti, who held that portfolio on two previous occasions, has drawn up a budget which has been dubbed by analysts as unambitious. To begin with, it starts out from growth forecasts of 1.5% for 2006, close to a half-point higher than those put out by the analysts as a whole, which reduces the possibility of putting the deficit at 3.8% of the GDP (4.3% in 2005), the most notable challenge in the budget. It has also raised doubts about the government’s real ability to bring about the key measure in the budget, namely, to cut 11.5 billion euros from government spending. In addition, the cut in the regional tax on economic activities, a measure constantly demanded by business and regarded as certain, was left out of the budget.
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