Research Dept. News
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Monthly Report, num 349 - September 2011
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European union - Italy
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Economic growth revives slightly in Italy
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After coming close to stagnation in the first quarter, the Italian economy picked up again slightly in the second. GDP rose by 0.3% compared with the previous quarter, slightly above the rate for the euro area. This recovery was boosted by industry and services, as the value added of agriculture fell. In any case, the year-on-year rate fell by two tenths of a percentage point to a modest 0.8%.
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The overall situation does not look like improving in the third quarter. Automobile sales fell in July by 10.7% compared with the same month the year before. Consumer confidence weakened again given the economic uncertainty and gloomy outlook for the labour market. The fall in industrial capacity utilization does not point towards vigorous investment. Industrial and services confidence also fell in July, although it rose in the retail trade. On the whole, the indicator for economic sentiment fell in July to slightly below its long-term average.
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The risk premium of Italian debt sets a record at the beginning of August...
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Italy's central government accounts seem to have improved during 2011. However, the slow rate of expansion in activity and the high level of public debt continued to raise concern among the markets given the sovereign debt crisis in the periphery of the euro area. As a result of tensions related to its sovereign debt risk premium, at the end of June the Italian government presented a new adjustment plan and speeded up its passing through parliament, so that it was approved by mid-July.
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This package finally set the reduction in net borrowing at around 80 billion euros but relegated the main part of the adjustment to 2013 and 2014, establishing budgetary equilibrium for the latter year. Among other measures, there was the rationalization of healthcare expenditure with co-payment in some cases, various adjustments in pensions, some tax hikes such as on fuels, a reduction in fiscal benefits, as well as promoting a programme to sell shares held by the state. However, as most of the consolidation has been postponed until after the general elections in 2013, this plan was not seen as credible by the financial markets.
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Although the five Italian banks that took part directly in the European Banking Authority stress tests published mid- July were correctly capitalized, the risk premium continued to rise and, on 4 August, the spread of interest rates for ten-year bonds with their German equivalents set a record of 386 basis points. Within this context, on 12 August the Italian government passed a new package of measures that went on to be debated in parliament.
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The aim of the new plan is to bring budgetary equilibrium forward to 2013. These measures include the simplification of the central and local administrative structure with a reduction in operating costs, a wage cut for members of parliament of between 10% and 20% and the introduction of a solidarity contribution for the next three years of between 5% and 10% from the highest income bracket. Similarly, it also proposes the liberalization of professional activity as well as the privatization of local public services.
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...and its rise is only contained by the European Central Bank intervening and by the Italian government presenting a new adjustment plan.
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The European Central Bank's intervention by buying up Italian public debt and the presentation of a new adjustment plan contained the rise in the risk premium, which fell to around 270 basis points by mid-August. However, this level is relatively high and slightly exceeds that of Spanish debt. Given this situation, it's unlikely that GDP growth will exceed 1% in 2011.
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