22 February 2013

Commission Winter Forecast 2013 - Italy

The recession extended throughout 2012,  completing six consecutive quarters of contraction in economic activity. As a result, in 2012 as a  whole, real GDP is estimated to have declined by 2.2 per cent. Domestic demand fell significantly, as high  uncertainty, tight financing conditions and the  impact of fiscal consolidation hit consumption and  investment. This led to a collapse in imports, while  exports increased on the back of sustained demand from non-EU trade partners. Indicators point to further contraction in economic activity in the first quarter of 2013, though at a  slowing pace. Investment is set to decline - also due to still tight financing conditions for the private sector - while consumers continue to refrain from spending on the back of long declining real disposable income. By contrast, sustained demand from non-EU trade partners continues to support exports. Lower yields on government securities are expected gradually to translate into improving financing conditions and confidence. As a result, domestic demand, and in particular investment in equipment, is set to resume growth in the second half of 2013.

In 2014, the projected normalisation in financing  conditions and reduced uncertainty are set to  sustain activity. As a result, private consumption is expected to increase slightly more than disposable income due to improving confidence, while investment in equipment picks up. As both imports and exports accelerate, net exports are no longer expected to contribute to growth. Real GDP is forecast to increase by 0.8 per cent.

In 2012, the general government deficit is  estimated at 2.9 per cent of GDP, from 3.9 per cent in 2011,  thanks to a primary surplus increasing to 2.6 per cent of  GDP while interest expenditure surged by 0.6 pp of GDP. Primary expenditure is estimated to have stabilised year-on-year, for the third year in a row. Social transfers increased slowly as the pension reforms are delaying access to retirement, while pensions above three times the minimum did not  benefit from the indexation to inflation. The wage bill continued shrinking due to the wage freeze and  employment downsizing. Revenues are estimated to have risen sharply despite the fall in nominal GDP, on the back of increased taxation on immovable property, transport fuel and financial  wealth. By contrast, despite a higher standard rate, the VAT outturn declined as purchases of tax-rich durable goods dropped.

Thanks to the full implementation of the consolidation measures adopted in 2011-12, the deficit is projected to narrow further to 2.1 per cent of  GDP in 2013, with an increasing primary surplus and marginally lower interest expenditure. Primary  expenditure is set to remain broadly stable again  due to further restraints in the wage bill and  moderate increases in social transfers, but also  thanks to the impact of the spending review adopted in the summer of 2012. Revenues are set  to increase slightly more than nominal GDP as the  further 1 pp. increase in the standard VAT rate and the new tax on financial transactions are only partially offset by renewed tax incentives to productivity-related pay and increased allowances for dependent children. In 2014, the deficit is projected to stabilise at 2.1 per cent of GDP. Primary expenditure is set to increase slightly year-on-year due to more dynamic social transfers as the non-indexation of higher pensions expires. Revenues are expected to rise less than nominal GDP, also on the back of further tax breaks for hiring new permanent employees. In structural terms, a broadly balanced budgetary position is expected for 2013, thanks to a structural  adjustment of 3½ pps of GDP in 2012-13. The  structural primary surplus is set to reach 5 per cent of  GDP in 2013 and recede marginally in 2014. The gross debt is projected to peak at 128.1 per cent of  GDP in 2013, before falling in 2014 thanks to the  sizeable primary surplus and the return of  economic growth.

Full Italian forecast

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