Transcript 12. ITALY

12. ITALY
Consumption supports recovery while the structural deficit worsens
After growing moderately in 2015, Italy’s economy is set to gain momentum in 2016 and 2017 as
domestic demand strengthens. Inflation is projected to remain low in 2016 also due to falling energy
prices, still high unemployment and limited labour cost pressures. In 2016 the debt-to-GDP ratio
declines only slightly also because the government structural balance is expected to deteriorate.
The recovery becomes more self-sustaining
Economic activity expanded by 0.5% (y-o-y) in the
first three quarters of 2015, although lower exports
dragged down growth in the third quarter.
Improving confidence and hard indicators suggest
that economic activity expanded further in the final
quarter, so annual growth is expected to turn out at
0.8% in 2015. Italy’s economy is set to grow at a
faster pace in 2016, but still below the euro-area
average. The continued fall in oil prices and an
expansionary fiscal stance are expected to support
domestic demand and to compensate for the
slowdown in exports. Although non-performing
loans still burden bank balance sheets, credit
conditions are set to improve in 2016 as monetary
policy remains accommodative. More favourable
credit conditions are set to support the
long-awaited recovery in investment, especially
machinery and equipment and non-residential
construction. Overall, real GDP is expected to
increase by 1.4% in 2016. Economic expansion is
set to continue in 2017 at 1.3% as higher imports
neutralise stronger external demand and
investment, and private consumption is assumed to
be constrained by the legislated increase in VAT
rates. The current-account surplus is set to stabilise
at 2.1% of GDP in 2016-17 as higher investment
offset the expected increase in savings. A further
slowdown in external demand, a possible
depreciation of emerging market currencies and
financial market turmoil pose downside risks.
The unemployment rate is forecast to decline
gradually and inflation to remain low in 2016
A three-year social contribution exemption on new
permanent hires supported the increase in
headcount employment seen over the course of
2015. This, together with a broadly stable labour
force, brought down the unemployment rate from
12.7% in 2014 to 11.9% in 2015. The 2016
Stability Law extends the scheme to new
permanent hires made in 2016, but only with
partial exemption (40%). As the recovery gathers
strength, employment is projected to continue
increasing in 2016 and 2017. Nevertheless, the
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unemployment rate is forecast to decline gradually
over the forecast horizon, as previously
discouraged people are set to join the labour force.
Upward pressure on labour costs is projected to
remain limited partly due to cuts to the labour tax
wedge. In addition, increases in real wages realised
over recent years on the back of lower-thanexpected inflation are expected to be taken into
account in future bargaining rounds. Moderate
wage dynamics, reduction in the tax wedge and
improving labour productivity are projected to lead
to increases in nominal unit labour costs below the
euro-area average in 2016 and 2017.
Graph II.12.1: Italy - Real GDP growth and contributions
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pps.
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forecast
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0
-2
-4
-6
-8
-10
08
09
10
11
Domestic demand
Imports
12
13
14
15
Exports
16
17
Real GDP (y-o-y%)
In 2015, HICP inflation was only 0.1%, as falling
imported energy prices offset the mildly positive
core inflation (0.7%). Falling energy prices and
limited wage pressures are set to curb inflation
dynamics also in 2016. HICP inflation is expected
to average 0.3% (y-o-y) in 2016 and to rise to
1.8% in 2017. A similar pattern is anticipated for
core inflation (0.8% in 2016 and 1.2% in 2017).
Part of the projected increase in 2017 comes from
a rise in VAT rates (standard rate by 2 pps. and
reduced rate by 3 pps.) included in the 2016
Stability Law to achieve the budgetary targets in
that year, unless alternative compensatory
measures are found. In the latter case, the 2017
HICP inflation could be significantly lower than
currently forecast.
Member States, Italy
An expansionary fiscal stance in 2016
In 2015, the deficit is anticipated to have fallen to
2.6% of GDP (from 3.0% in 2014), aided by a
further drop in interest expenditure and a slightly
higher primary surplus stemming from positive
economic growth. Current primary expenditure is
set to have increased by around 1% year-on-year in
nominal terms, mainly driven by the impact of the
tax credit to low-wage employees, the extension of
unemployment benefits, and new hiring in the
education system. Outlays related to the migrant
influx are estimated by the government at around
0.2% of GDP in 2015, only 0.05 pps. higher than
in 2014 but more than twice those recorded over
2011-2013. Public investment bottomed out after
five years of contraction, while one-off outlays
related to a Constitutional Court ruling about the
full de-indexation of higher pensions over 2012
and 2013 affected capital transfer dynamics. On
the revenue side, the improving economic outlook
implied positive developments for personal and
corporate income tax revenues, while VAT
revenues benefited from discretionary measures to
increase tax compliance. The reduction in the
labour tax wedge affected intakes from the
regional tax on economic activities (IRAP) and
social contributions. Overall, the annual increase in
revenue is set to have been broadly in line with
nominal GDP growth. The structural balance is set
to have marginally improved in 2015 relative to
2014. In 2016, despite the positive growth outlook,
the headline deficit is projected to decline
marginally to 2.5% of GDP. This reflects the
expansionary impact of the 2016 Stability Law,
including EUR 3.2 bn of additional expenditure on
security and culture that increased the deficit target
to 2.4% of GDP from the 2.2% planned in the
Draft Budgetary Plan. As a result, the structural
balance is expected to worsen by around ¾ pps. of
GDP in 2016. Primary expenditure is expected to
continue increasing at a moderate pace (0.9%
y-o-y in nominal terms). On the other hand, tax
revenues are forecast to increase less than nominal
GDP growth, mainly due to further cuts to the
labour tax wedge and the abolition of property
taxation on first residences. As a result, the tax
burden is set to fall by nearly ¾ pps. of GDP
compared to 2015. Based on a no-policy-change
assumption, the headline deficit is projected to
decline to 1.5% of GDP in 2017, including the
legislated increase in VAT rates. After the peak
reached in 2015 (just below 133% of GDP) the
government debt ratio is set to decrease only
slightly in 2016, also due to the worsening
structural balance, and more in 2017 thanks to
higher nominal growth and primary surplus.
Table II.12.1:
Main features of country forecast - ITALY
2014
bn EUR
GDP
Private Consumption
Public Consumption
Gross fixed capital formation
of which: equipment
Exports (goods and services)
Imports (goods and services)
GNI (GDP deflator)
Contribution to GDP growth:
Annual percentage change
Curr. prices
% GDP
96-11
2012
2013
2014
2015
2016
2017
1613.9
100.0
0.9
-2.8
-1.7
-0.4
0.8
1.4
1.3
986.3
61.1
1.1
-3.9
-2.7
0.4
0.9
1.5
0.6
315.3
19.5
1.0
-1.4
-0.3
-0.7
0.2
0.1
1.0
268.1
16.6
1.1
-9.3
-6.6
-3.5
1.0
3.8
4.8
87.4
5.4
1.7
-13.6
-7.3
-2.9
4.0
5.8
7.1
477.2
29.6
2.2
2.3
0.8
3.1
4.3
3.1
4.4
428.4
26.5
3.2
-8.1
-2.5
2.9
5.3
4.9
4.9
1613.4
100.0
0.9
-2.7
-1.8
-0.2
0.8
1.4
1.3
1.0
-4.5
-2.9
-0.5
0.8
1.6
1.4
0.0
-1.2
0.3
-0.1
0.2
0.2
0.0
-0.2
2.9
0.9
0.1
-0.1
-0.4
0.0
Domestic demand
Inventories
Net exports
Employment
Unemployment rate (a)
Compensation of employees / f.t.e.
Unit labour costs whole economy
Real unit labour cost
Saving rate of households (b)
GDP deflator
Harmonised index of consumer prices
Terms of trade goods
Trade balance (goods) (c)
Current-account balance (c)
Net lending (+) or borrowing (-) vis-a-vis ROW (c)
General government balance (c)
Cyclically-adjusted budget balance (d)
Structural budget balance (d)
General government gross debt (c)
0.4
-1.4
-2.5
0.2
1.1
1.1
1.0
8.8
10.7
12.1
12.7
11.9
11.4
11.3
2.9
0.4
1.5
0.6
0.4
0.4
1.0
2.4
1.9
0.7
1.3
0.6
0.0
0.6
0.1
0.5
-0.6
0.4
0.1
-0.8
-0.9
14.5
9.4
11.3
10.8
11.0
11.6
11.9
2.4
1.4
1.3
0.9
0.5
0.8
1.6
2.3
3.3
1.3
0.2
0.1
0.3
1.8
-0.4
-1.4
1.7
3.0
3.7
2.2
0.0
0.8
1.0
2.2
3.0
3.3
3.3
3.3
-0.6
-0.4
0.9
2.0
2.2
2.1
2.1
-0.5
-0.2
1.0
2.2
2.4
2.3
2.2
-3.4
-3.0
-2.9
-3.0
-2.6
-2.5
-1.5
-1.4
-3.5
-1.2
-0.7
-0.9 -
-1.0
-1.7
-
-1.3
-0.9
-1.1 -
-1.0
-1.7
-1.4
107.1
123.2
128.8
132.8
132.4
130.6
132.3
(a) as % of total labour force. (b) gross saving divided by gross disposable income. (c) as a % of GDP. (d) as a % of potential GDP.
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