05 November 2013

Italy: Autumn 2013 economic forecast - From recession to mild, export-led recovery

After a further sharp contraction in 2012-13, economic activity is set to recover gradually in 2014-15. Employment lags behind, while inflation remains subdued and the budgetary correction is slowing down after the large effort made in 2012.

Against the background of persistently tight credit conditions, domestic demand continues to act as a major drag on growth and in 2013 economic activity is projected to contract by 1.8%, after -2.5% recorded in 2012. However, improved business confidence since the early summer, mainly driven by a positive assessment of export orders, foretells a gradual mild recovery in output as from the fourth quarter of 2013.

In 2014, Italian banks are expected to continue adjusting their balance sheets also in the framework of the forthcoming asset quality review and stress test related to the launch of the Single Supervisory Mechanism. Therefore, credit conditions are projected to ease only gradually, while firms' liquidity is supported by the on-going settlement of government trade debt arrears. This, together with a more neutral fiscal stance, is set to turn the economy to a mild expansion with real GDP growth projected at 0.7% in 2014.

On the back of the deep and protracted recession, headcount employment is set to continue falling substantially in 2013, then stabilise in 2014 and recover only in 2015. Combined with a modest rise in the labour force, this brings the unemployment rate at a peak of 12.4% in 2014. HICP inflation is set to average 1.5% in 2013 and remain fairly stable over the forecast horizon.

In 2013, the general government deficit is forecast to remain at 3.0% of GDP, including the full budgetary execution of consolidation measures enshrined in legislation. Interest expenditure is anticipated to fall thanks to the recent decline in the sovereign risk premium.

The general government gross debt is set to continue increasing, peaking at 134% of GDP by 2014, also due to the settlement of trade debt arrears. The debt ratio is then forecast to decline slightly in 2015.

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