OECD Economic Outlook May 2019, Country Notes: Italy by OECD

162 

Italy GDP is projected to stagnate in 2019 and expand by 0.6% in 2020. Sluggish employment growth and a rising household saving rate are holding back private consumption, while weak external demand and global trade tensions are hurting exports. Lower business confidence and weak demand are depressing private investment, while project planning and execution delays continue to hinder public investment. Consumer price inflation has moderated markedly as energy price pressures have abated and private-sector wage growth remains modest. Fiscal expansion and low growth are projected to widen the budget deficit to 2.4% of GDP in 2019 and 2.9% of GDP in 2020. The planned large increase in social spending will help to reduce poverty. Social spending should be inter-generationally fair while also promoting employment growth, especially among women and the young. Streamlining administrative procedures and strengthening capacity at central and local levels are necessary to revive public investment. Enhancing competition in markets that are still protected, raising public administration efficiency and removing obstacles to firms’ growth would foster productivity growth. The economic slowdown has been broad-based Sluggish external and domestic demand and falling business confidence have led to a drop in investment growth and a large decline in inventories, contributing to the technical recession in the latter half of 2018. In addition, weak activity in major trading partners, especially Germany, and uncertainties relating to Brexit and global trade arrangements have hurt key export sectors, such as the automotive and mechanical industries. Consumer confidence has weakened, though it remains high, and the household saving rate has risen, contributing to more sluggish household consumption. Unemployment has stopped falling and remains high, especially among the young and women. Ample slack in the labour market and stagnant productivity are damping private-sector wage growth.

Italy 1 GDP growth will recover but remain modest

The slowdown has been broad-based Volumes

Y-o-y % changes 2

Y-o-y % changes 10

-1

-5

-2

-10 Private consumption Investment

-3 -4

Exports

2012 2013 2014 2015 2016 2017 2018 2019 2020

-15 -20

Source: OECD Economic Outlook 105 database. StatLink 2 https://doi.org/10.1787/888933934603 OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019

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Italy: Demand, production and prices

2015

2016

Current prices EUR billion

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

1 650.9 1 006.7 311.8 279.4 1 597.9 5.5 1 603.4 493.1 445.5 47.6

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

_ _ _ _ _ _ _ _ _

Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2017

2018

2019

2020

Percentage changes, volume (2010 prices)

1.2 1.3 0.1 3.7 1.5 0.2 1.6 2.3 3.8 -0.4

1.8 1.5 0.3 4.5 1.8 -0.4 1.4 6.4 5.8 0.4

0.7 0.6 0.2 3.2 1.0 -0.1 0.9 1.4 1.8 -0.1

0.0 0.4 -0.2 -0.2 0.2 -0.4 -0.2 1.8 1.1 0.3

0.6 0.5 0.4 0.9 0.6 0.0 0.6 2.3 2.6 0.0

1.2 -0.1

0.5 1.3

0.8 1.2

0.5 0.6

1.1 1.0

0.5 0.8 0.6 0.4 1.0 11.7 11.3 10.6 11.7 12.3 3.2 2.4 2.6 3.7 4.1 -2.5 -2.4 -2.1 -2.4 -2.9 156.7 154.1 149.3 151.0 151.9 131.3 131.2 132.2 134.1 135.0 2.5 2.8 2.6 2.6 2.5

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 105 database.

StatLink 2 https://doi.org/10.1787/888933935534

Italy 2 Poverty among the young is high

The labour market has worsened

Poverty rates¹

% 14

Y-o-y % changes 2

% of labour force 14

Below 18

18-34 years

-1

65 years and over

10 8

0 6 4

← Total employment

-2

2009

2011

2013

2015

2017

-3

Unemployment rate →

2012

2014

2016

2018

2020

1. The ISTAT absolute poverty measure reports the share of individuals belonging to households with overall consumption expenditure below a socially necessary minimum, adjusting for the number and age of household members and price levels in the household's location. Source: OECD Economic Outlook 105 database; and ISTAT. StatLink 2 https://doi.org/10.1787/888933934622

164  Banks’ non-performing loans continue to decline, reaching 4.5% of total outstanding loans (net of loan loss provisions). Loan quality has improved and the ratio of new non-performing loans to outstanding loans has dropped to pre-crisis levels, below 2%. Credit standards for new loans remain favourable and lending rates – along with banks’ funding costs – are low. Despite these supportive credit conditions, bank lending to businesses fell in early 2019 as demand for credit diminished. Surveys report that firms are cutting back their investment plans. Low growth and expansionary fiscal policy will increase the budget deficit from 2.1% of GDP in 2018 to 2.4% in 2019. The 2019 budget involves net new measures amounting to 0.6% of GDP, mostly consisting of higher social spending through a new early retirement scheme (for a three-year period) and a new and more generous guaranteed minimum income scheme (the Citizen’s Income). These expansionary policies will be offset only partly by spending cuts, by at least EUR 2 billion as agreed with the European Commission, and higher business income taxes. These projections assume that the government will implement only about half of the planned VAT hikes in 2020, amounting to about 1.3% of GDP in total. For this reason, and assuming no other major policy change, the budget deficit is projected to rise further, to 2.9% of GDP in 2020. Given low nominal growth, gradually rising interest costs and a larger deficit, the public debt ratio (on a Maastricht basis) is projected to increase to 135% of GDP in 2020.

Broad-ranging reforms are needed to revive growth and broaden its benefits The high debt-to-GDP ratio leaves Italy vulnerable to changes in interest rates, limiting policy choices to boost growth and pursue social goals. A clear and credible medium-term reform plan to boost growth and reduce the debt-to-GDP ratio is a prerequisite to improving fiscal credibility and reducing the risk premium on government borrowing. Public spending needs to become more efficient and better targeted with a fairer and progressive personal income tax system. Designing thorough spending reviews during the preparation of the yearly budget and effectively implementing them would promote priority-setting and spending re-allocation, contributing to free up resources for effective public programmes and public investment. Improving voluntary tax compliance and vigorously fighting tax evasion would lead to higher tax revenues and allow for a reduction in tax rates. Increasing productivity growth is key to raising living standards and to offsetting the large negative effect of demographics and a shrinking labour force. In addition to enhancing competition in markets that are still protected, such as professional services and local public services, increasing productivity will require removal of obstacles hampering the growth of SMEs. This in turn will require revising the aspects of the tax system that discourage firms to grow, and enhancing the efficiency of public administration and the justice system, by raising accountability and transparency and pursuing the digitalisation of the public sector. Raising the employment rate, which is still one of the lowest among OECD countries, is also crucial to boost growth and social inclusion. Raising the employment rate will hinge on reducing employer social security contributions; improving the effectiveness of public employment services; and strengthening work incentives, by recalibrating the Citizen’s Income and introducing an in-work benefit system for low-wage workers. A national minimum wage, whose introduction is being discussed, will need to be set at a level not to harm employment in the formal labour market.

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Growth will resume at a modest pace GDP growth is projected to resume at a modest pace in 2019 and to strengthen slightly in 2020. Uncertainty will curb the propensity of households and firms to consume and invest, offsetting the effects of the fiscal expansion on activity in 2019. Weak external demand will continue to hinder export growth while moderate domestic demand growth will result in low import growth. The current account surplus will remain high, at about 2.5% of GDP. Limited wage growth and gradually rising consumer price inflation will reduce real wage gains. This, along with sluggish employment growth, will check real household income and private consumption growth. Renewed financial market turmoil is an important downside risk. Political uncertainty and a new standoff with the European Commission on the next budget would result in persistent large increases in sovereign bond spreads, raising banks’ funding costs and hurting banks’ balance sheets and capital ratios, thus reducing bank credit and investment. A disorderly Brexit would harm trade, depressing exports and leading firms to further reduce investment. On the other hand, if the planned boost to public investment and the recovery of the construction sector materialised faster than expected, investment growth would accelerate. Rapid progress on the planned reform of public employment services would support employment growth, buttressing incomes and private consumption.