Research Dept. News
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Monthly Report, num 357 - May 2012
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European Union - Italy
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The Italian economy: diminuendo
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The Italian recession looks like continuing...
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According to available economic indicators, the recession in which the Italian economy has found itself since the second half of 2011 looks like continuing in the first quarter of this year. Given the accumulated problems of competitiveness, the effects of budgetary consolidation and the peripheral debt crisis that has yet to be resolved, we have kept to our forecast of a drop in GDP of 1.5% for the year as a whole. The country's recovery will therefore come later on, when the impact is noticed of the reforms being undertaken by the government of the former EU commissioner, Monti.
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However, some signs of improvement have appeared recently within this delicate situation. In January retail sales grew by 0.7% in real terms compared with the previous month, after two consecutive falls. Nonetheless, consumption is weak in general, as households are cautious due to expectations of a reduction in disposable income and the upward trend in unemployment. Consequently, automobile sales plummeted by 26.7% in March compared with the same month last year. The outlook for investment isn't favourable either, with falling domestic demand, low utilization of production capacity and rather tense financing terms, although these have been relaxed somewhat thanks to the actions of the European Central Bank.
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From the point of view of supply, particularly of note is the bad patch industry and construction are going through. Industrial production fell by 0.7% in February compared with the previous month and by 6.8% compared with the same month in 2011. Moreover, the order portfolio shrank by 2.5% month-on-month in February, although foreign orders rose by 1.1%. Industrial confidence therefore picked up to some extent in March. With regard to construction, in February production fell by 9.9% month-on-month and by 23.0% year-on-year, according to figures corrected for calendar effects. However, the sector's confidence also recovered somewhat in March. The sentiment of the services sector also improved at the end of the first quarter.
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A balanced budget is put off until 2015.
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Given the adverse domestic situation, the foreign sector appears to be the only resource for growth. In this respect, the data from the first few months of the year seem to point to some support from foreign demand. In the period December-February, goods exports grew by 2.1% compared with the previous three months while imports fell by 1.6%.
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With regard to economic policy, in 2011 the public deficit stood at 3.9% of GDP, achieving the target set. However, in the 2012 Stability programme presented in April, the goal of a balanced budget, which should have been reached by 2013, has been postponed to 2015. For 2012 the target is 1.7% of GDP based on a projected fall in GDP of 1.2%, larger than the previous figure. Growth will pick up again in 2013 and will reach 0.5% according to the official document. Similarly, the ratio of public debt to GDP, after reaching 123.4% in 2012, will tend to fall.
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The labour reform bill presented by the government on 23 March aims to create a more dynamic, flexible and inclusive job market capable of contributing to growth and boosting company competitiveness, as well as safeguarding employment and the employability of citizens. Among other measures, it facilitates dismissal for economic reasons and increases contributions for temporary contracts. However, given the opposition of the trade unions and the Democratic Party, the government expects a change in the wording to allow workers to be readmitted should a court rule that the alleged economic reasons are unfounded, in exchange for lower compensation payments for dismissal. This has led to opposition by employers' representatives.
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The markets are pressurizing Italy's risk premium again.
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For the time being, the labour reform is continuing its path through parliament and could achieve broad political support. However, the impending local elections in May and general elections in 2013 represent a certain risk. Within this panorama, the spread for Italian debt increased slightly in April, going above 400 basis points, although it is still far below its record high of November 2011 and particularly its peak in January.
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