Italy - OECD Economic Outlook 2019 by OECD

 157

Italy GDP growth is projected to resume very gradually. Global trade uncertainty and softer external demand will continue to weigh on export growth and business investment. Consumption will gradually pick up, as households’ disposable incomes keep rising and as confidence stabilises. Fiscal policy is projected to support activity through reduced tax burdens and social security charges, as well as higher public investment and tax incentives for business investment. The primary budget surplus is expected to continue falling modestly in 2020, and then to stabilise in 2021. This will allow the high public debt-to-GDP ratio to start falling from 2021. A comprehensive fiscal reform is key to improving spending effectiveness, enhancing the equity and efficiency of the tax system and reducing the debt burden. Improving public services, reducing the regulatory burden, and enhancing job-search and training programmes would buttress investment and employment and reduce income and regional disparities. The economy has remained weak GDP growth remains feeble amid low confidence. Firms have drawn down inventories as major trading partners’ growth slows and trade restrictions generate uncertainty about future demand. Industrial production has weakened whereas services activity has been more robust and construction has picked up after a deep recession. Employment has continued to expand, though at a slowing pace, with a larger share of new positions filled by permanent contracts. Flat productivity growth continues to constrain private sector wage increases. Consumer confidence has weakened, hindering private consumption growth through rising household saving rates.

Italy 1 Private consumption and investment are projected to grow slowly Y-o-y % changes 8

Employment growth has moderated

Volumes

% of population 15-74 53

% of labour force 13

-4 Private consumption Investment

-8

-12

← Employment rate

2011

2013

2015

2017

2019

2021

Unemployment rate →

2012

2014

2016

2018

2020

8 7

Source: OECD Economic Outlook 106 database. StatLink 2 https://doi.org/10.1787/888934045601

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

158 

Italy: Demand, output and prices 2016

2017

Current prices EUR billion

Italy GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1

1 696.3 1 019.5 322.6 291.3 1 633.4 7.8 1 641.2 496.7 441.6 55.1

Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2

General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

_ _ _ _ _ _ _

2019

2020

2021

Percentage changes, volume (2015 prices)

1.8 1.5 -0.2 3.5 1.5 0.2 1.6 6.6 6.7 0.2

0.7 0.8 0.4 3.0 1.1 -0.2 1.0 1.3 2.4 -0.3

0.2 0.4 0.4 2.9 0.9 -1.3 -0.5 2.7 0.8 0.6

0.4 0.4 0.3 0.8 0.5 0.0 0.4 1.3 1.5 0.0

0.5 0.4 -0.1 1.0 0.4 0.0 0.4 1.8 1.9 0.0

0.7 1.3

0.9 1.2

0.6 0.6

0.7 0.6

1.1 1.2

_ _

Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP)

2018

0.8 0.6 0.5 0.8 1.2 11.3 10.6 10.0 10.0 10.2 2.5 2.5 4.3 5.2 5.3 -2.4 -2.2 -2.2 -2.2 -2.0 153.3 148.5 149.5 150.1 149.9 134.0 134.9 136.0 136.1 135.6 2.6 2.5 2.7 2.7 2.8

1. Contributions to changes in real GDP, actual amount in the first column. 2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco. Source: OECD Economic Outlook 106 database.

StatLink 2 https://doi.org/10.1787/888934046570

Italy 2 The budget deficit is narrowing slowly, but public debt remains high % of GDP 5

Gross public debt →

Italian government bond spreads have returned to early-2018 levels 10-year government bond spreads¹

% of GDP 140

% pts 350

← Budget deficit

135

130

125

300 250 200 150

120

2011

2013

2015

2017

2019

2021

115

100 0

2015

2016

2017

2018

2019

1. 10-year Italian government bond yield less 10-year German government bond yield. Source: OECD Economic Outlook 106 database and Refinitiv. StatLink 2 https://doi.org/10.1787/888934045620

 159 Lending to firms has been contracting since early 2019 as banks tightened credit standards modestly. The ECB’s loosening of monetary policy, falling spreads on government bonds and rising bank deposits have reduced funding costs for banks. This has started to pass into lower lending rates for borrowers. Bad loans to non-financial corporations have fallen 1 percentage point since January 2019 to 8.9% of outstanding loans. Demand for loans for business investment and housing has picked up, and businesses plan to expand investment.

A comprehensive reform plan is key Fiscal policy is supporting activity in the face of weaker external growth. The primary budget surplus is estimated to fall from 1.3% of GDP in 2018 and 2019 to 1.0% of GDP in 2020 and 2021. The government plans new policy measures for 2020 and 2021, including lower social contributions, renewing fiscal incentives linked to the “Industry 4.0” programme to encourage private investment, and higher public investment especially in lagging regions. The government plans to finance these measures through higher revenues, including new environmental and sugar taxes, raising VAT compliance, lower interest costs and spending cuts. Overall, the fiscal measures and slower growth will make the public debt ratio rise in 2019 to 136% of GDP before it starts falling from 2021. The government is committed to support activity while complying with the EU Growth and Stability Pact. Putting public debt on to a sustained downward path, while supporting growth, especially in lagging areas, will require implementing a credible medium-term fiscal plan alongside ambitious structural reforms. Applying spending reviews to rationalise spending, reversing the changes in early retirement rules introduced in 2019 and preserving the link between retirement ages and life expectancy would free resources for more effective programmes and public investment and improve inter-generational equity. Reducing tax expenditures, especially environmentally harmful subsidies, and combatting tax evasion will support revenues and broaden the tax base, allowing the government to raise environmental quality and enhance the fairness of the tax system. Lasting and inclusive gains in income and living standards require raising Italy’s lagging productivity and employment. Reducing administrative barriers to investing and enhancing competition in markets that are still protected, such as professional services, would support productivity and investment. Improving public sector performance, especially in lagging regions, is pivotal to raising productivity, activity and inclusiveness. Strengthening the public employment services is central to the Citizen’s Income social protection and work activation programmes. Implementing the government’s plans to expand access to childcare and increase education and care support for families will improve inclusiveness and reduce barriers to work for women.

Growth will slowly resume GDP growth is projected to be around ½ per cent in 2020 and 2021. Weak external demand and persistent uncertainties relating to global trade policies will limit export growth, weighing on investment, employment and incomes. On the other hand, household consumption will rise moderately, supported by stabilising consumer confidence and cuts to the tax wedge for many dependent workers. Reduced domestic policy uncertainty, easier financing conditions and tax incentives are expected to support investment.

160  A deeper or prolonged slowdown in global trade or trading partner growth would significantly harm the outlook, due to Italy’s openness. High public debt ratios mean that Italy’s borrowing costs and banks’ lending remain sensitive to a renewed deterioration in market conditions and sovereign risk perceptions. On the other hand, quicker improvements in the effectiveness of public services, in the execution of public investment projects, or in reducing administrative and regulatory burdens would boost domestic investment, employment and consumer confidence. Greater progress in rationalising tax expenditures and improving the effectiveness of public spending would raise the primary surplus, boosting confidence and reducing public debt faster than projected.