The economic outlook in Italy

Roberto Sabbatini Alberto Locarno

Economics, Research and International Relations Department Bank of Italy

March 7, 2011
1

GDP growth continues, with a slowdown in H2-2010

GDP growth and its main determinants in 2010
(percentage changes on previous period) Italy GDP
2009 2010 I -5,2 1,3 0,4 II 0,5 III 0,3

France
IV 2009 2010 I 0,1 -2,6 1,5 0,3 -2,3 0,6 -7,1 -6,3 -8,0 -2,3 -12,4 II 0,6 III 0,3

Germany
IV 2009 2010 I 0,3 -4,7 3,6 0,6 2,6 0,5 1,9 0,2 1,5 II 2,2 2,2 0,4 5,5 III 0,7

Euro area
IV 2009 2010 I 0,4 -4,1 1,7 0,4 0,9 0,3 II 1,0 0,9 0,2 III 0,3 0,2 0,1 IV 0,3

-4,0 1,7 0,4 National demand -1,8 1,0 0,2 Household consumption Gross fixed investment -11,9 2,5 1,3 -8,7 -3,7 -0,5 Construction -15,3 9,6 3,4 Other invest. goods

-0,1 0,8 0,0 2,0 0,3 0,9

-0,3 0,8 0,1 0,3

0,6 -0,1 -1,9 0,5 0,5 0,8 -0,2

0,0 -0,5 -3,4 0,5 0,2 -1,1

-0,7 0,9

0,4 -10,1 5,5 2,8

1,5 -1,1 -11,4

-0,4 2,0 -0,3 -1,6 1,7 -0,8 1,0 0,7 2,6 2,3 0,4 4,4 0,3 0,1 1,9

-0,3 0,6 4,5 1,2

-1,8 0,3 -0,2 -0,3 -1,5 0,7 1,7 1,2

-0,8 6,9 -0,8 -3,9 -7,8 3,7 1,0 4,2 3,7 1,6 -15,0

1,3 -22,6 9,4 0,8

Change in stocks (p.p.) Total exports

-0,6

0,7

0,1 -0,6 0,5 3,4 2,4 2,8

-0,2 0,5 4,8 2,8

0,2 -0,8 -0,3 2,6

1,0 -0,8 -0,4 -0,8 7,9 2,3 2,5 -13,2

-18,4 9,1

0,8 -14,3 14,2 3,0

Q3-2010: a) the chief impulse to GDP growth (0.3% q-o-q) still come from exports (2.8%) b) household consumption increased moderately (0.3% compared to stagnation in Q2); slowdown in capital accumulation (0.9% compared to 2.0; termination in June of the tax incentives; Tremonti-ter law expired last June)
Q4-2010 (data released 11 March; revision in the annual profile following the recent release in the annual national accounts for 2010, with revised figures for 2009). Preliminary evidence: a) Slowdown in export 2 b) Domestic demand (households consumption) remains rather weak

120
Italia Germania

120 GDP 115

115

Area dell'euro

110

110

In Italy the GDP recovery of pre-crisis levels is slower than for the euro area (Germany in particular)
Part of the explanation involve export performance: Italian firms are exploiting the expansion of world demand, but they seem to do so less than other countries (Germany in particular)

105

105

100

100

95 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

95

180
Italia

180 EXPORT 170 160 150 140 130 120

ITA = 26,8% GER = 43,8% AREA= 41,3% Germania Area dell'euro

170 160 150 140 130 120 110 100 90 80

110 100 90 80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Italian GDP performance during the cyclical recovery

Lower average quarterly growth rate compared to:
a) the euro area (Germany) b) the recession at the beginning of the 1990s
Euro area
Peak Trough Cumulated loss Recovery up to Q4-2010 (estimates for Q4) Average quarterly rate since the trough (1) Recession 1992-93: average quarterly rate from the trough up to the next 5 quarters Average growth in 2010 (2) Average yearly growth during 2001-2007 Average yearly growth during 1991-2000 2008Q1 2009Q2 -5,3 2,3 0,4

France
2008Q1 2009Q1 -3,9 2,0 0,3

Germany
2008Q1 2009Q1 -6,6 4,6 0,8

Italy
2007Q3 2009Q2 -6,8 1,4 0,3

0,5 1,7 1,9 2,2

0,6 1,5 1,8 2,0

0,6 3,6 1,2 2,1

0,8 1,3 1,1 1,6

(1) Average in the following 7 quarters for France and Germany and 6 quarters for Italy and the euro area.

The latest cyclical indicators suggest that economic activity might resume in Q1-2010
On the supply side, industrial production was slightly negative in Q4-2010 (responsible for the rather poor GDP growth in the same period); it should increase again in Q1-2011 (our preliminary estimates), at a rate broadly in line with the first 3 quarter of 2010
Share of industrial sectors in "expansion" (output increased in the last 2 "moving" quarters)
(percentage share with respect to the sectoral weight on the total index of industrial production)

8 6 4 2 0 -2 -4 -6 -8 -10 2005 2006 2007 2008 2009 2010 2011

112 108 104 100 96 92 88 84 80 76

Q/Q change (left scale) Point data Three terms moving average

100 90 80 70 60 50 40 30 20 10 0
n0 fe 9 b0 m 9 ar -0 ap 9 rm 09 ag -0 gi 9 u0 lu 9 g09 ag o0 se 9 t-0 9 ot t-0 no 9 v09 di c09 ge n1 fe 0 b1 m 0 ar -1 ap 0 rm 10 ag -1 gi 0 u1 lu 0 g10 ag o1 se 0 t-1 0 ot t-1 no 0 v10 ge

Germania

Italia

At the sectoral level the recovery in industrial production is not widespread: less than 1/3 of sectors (in terms of their weight) in facing an expansion (mainly, the metal sector), i.e. 2 consecutive quarters of growth; about a similar proportion of sectors is in recession (comparison with 5 Germany)

120 febbraio

120

Mixed signals come from business surveys (overall rather favourable): a) on the one hand ISAEs (now ISTAT) business confidence survey stop improving in February b) On the other PMI of manufacturing (and services) increased, remaining well above levels compatible with an expansion Instead, households were less optimistic at the beginning of 2011 (confidence indicator)

110

110

100

100

90 Consumer confidence Business confidence 2005

65 Purchasing Managers' Index 60 55 50 45 Area dell'euro 40 35 30 2005 2006 2007 2008 2009 2010 2011 Francia Germania Italia

90

80

80

70 2006 2007 2008 2009 2010 2011

70

65 60 55 50 45 40 febbraio 35 30

On the demand side, exports are less vigorous

According to foreign trade data (and our estimates for December for intra-EU flows) the value of exports of goods increased by 1.7% in Q4-2010 q-o-q (compared to more than 5% in the previous 2 quarters). Strong rebound in January (caveat in drawing strong conclusion from data for this month)
Exports of goods in values 190 180 170 160 150 140 130 120 110 100 90 80 70 2005 2006 Euro Area Italy Germany France 2007 2008 2009 2010 2011
dicembre

190 180 170 160 150 140 130 120 110 100 90 80 70

Source: for Italy, France and Germany, national statistics; for the Euro area, Eurostat.

Household spending remained cautious in Q3-2010 (+0.3% q-o-q according to national account)
2,0 2,0 1,0 1,0 0,0 0,0

-1,0

-1,0

...reflecting the contraction in real disposable income (first 9 months of 2010)...

Households expectations on unemployment
(balance of opinions; an increase denotes worsening expectations)
150

-2,0

-2,0

Households' consumption (average 3 quarters for 2010) Real disposable income (average 3 quarters for 2010) -3,0 2004 2005 2006 2007 2008 2009 2010 -3,0

...and the weakness of the labour market: a) employment continued to contract in Q3-2010 (0.2% on a SA basis; quarterly Labour Force Survey); the fall was more pronounced among young people Monthly data for January (preliminary) confirm that employment is not recovering b) households assessment of labour market conditions (expectations on unemployment) has improved (but not in January) but still far from pre-crisis levels

125

Germania Francia Area euro Italia (Isae)

100

75

50

2006

2007

2008

2009

2010

2011

...and there are no firm signs of a pick-up in the last months

Volume of retail sales
(SA, 3-month moving average)

In Italy in Q4-2010 the volume of retail sales fell by -0.4% q-o-q

115

115

110

Area dell'euro Germania Italia Francia (1) Francia (2)

110

105

105

100

100

95

95 gennaio

Car registrations
(SA data, levels)
220000 210000 200000 190000 180000 170000 160000 150000 140000 130000 2006 2007 2008 2009 2010 2011 immatricolazioni media mobile di tre termini media annua 220000 210000 200000 190000 180000 170000 160000 150000 140000 130000
90 2005 2006 2007 2008

90 2009 2010

New car registrations rose by 3.5% in Q4 q-o-q; however, they recorded a sharp fall in January only partly offset by the rise in February (levels are still historically low). In both months new orders from car 9 dealers decreased

Inflation is rising (levels similar to those for the euro area)

In H2-2010 inflation (CPI) was 1.7%, compared with 1.3% in H1; it rose to 2.4% in February The recent increase was largely due to the acceleration in energy and food prices. However, inflation net of energy products also rose (1.8% in February): food prices, local tariffs and, in February, widespread increases in prices of transport services.
CPI net of energy products
(percentage changes, SA data except for the 12-month changes)
5 4 3 2 1 0 -1 -2
a 3 mesi (1) a 12 mesi a 1 mese (1)

5 4 3 2 1 0 -1 -2

2007

2008

2009

2010

2011

Only some evidence of moderate indirect effects of recent increases in energy prices (transport services in February) but no second-round effects through wage bargaining (at least for 2011). Indeed the recent renewal of the contract in the trade sector indeed was in line with HICP (net of imported energy) forecasts (ISAE, May 2010). The wage outlook remains moderate. Remark: in January (and in 2011) impact on the y-o-y percentage changes of a new method to 10 deal with seasonal products (EC-Regulation).

Short-term forecasts - GDP

(percentage changes on the previous period) Area euro France Germany Italy
2010 I tr. 0,4 0,3 0,6 0,4 II tr. 1,0 0,6 2,2 0,5 III tr. 0,3 0,3 0,7 0,3 IV tr 0,3 0,3 0,4 0,1 Anno 1,7 1,5 3,6 1,3 2011 Private analysts (February) I tr. 0,5 0,5 0,7 0,3 Anno 1,9 1,9 2,7 1,1 2011 European Commission (Interim forecasts - 1 March) I tr. 0,5 0,6 0,6 0,3 Anno 1,6 1,7 2,4 1,1

The macroeconomic scenario in Italy

(Economic Bulletin - Jan. 2011) GDP Household consumption Government consumption Gross fixed investment Exports Imports Inflation (HICP) 2011 0,9 0,8 -0,8 2,5 6,0 5,1 2,1 2012 1,1 0,8 -0,3 2,4 5,3 4,4 2,0

Economic Bulletin - July 2010 GDP Inflation

1,0 1,9

Growth a) About 1% in 2011-12 (growth remains weaker than that envisaged for the euro area) b) Growth still sustained mainly by exports (domestic demand still weak) c) In 2012-Q4 GDP will have recouped about half of the almost 7 p.p. loss suffered during the recession

Employment Only a modest recovery in employment is envisaged for 2011-12 (about 0.5% per year in the private sector)
Inflation About 2% in 2011 and 2012 (subject to moderate upward risk)
11

Main risks to growth

Fears for the sustainability of some euro-area countries sovereign debt, that could result in higher costs of finance for the private economy as well.
Geo-political tensions (oil)

12

Thank you for the attention

13