A step backward before leaping forward? Country Risk Level AASENSITIVE
H CRI
FFI 3
Overview The recession will persist in 2013 (-0.8%) but the satisfactory trend in fundamentals points to a gradual recovery from H2 2013 onwards. Domestic demand weakened significantly over the course of 2012 (down -4% compared with 2011), with household consumption down -3.5% and the investment component down -8.4%. However, the implementation of structural reforms by the Monti government (tax reform with a view to making the system more efficient, labor market reform and an improvement in the business environment) should pave the way for a gradual improvement in the economic situation thanks to an investment-driven rebound in domestic demand, assisted by a continued good export performance. This scenario remains subject to the political uncertainty surrounding an expected change in government in 2013 and any willingness of the incoming government to stick to the timetable for reforms initiated by its predecessor.
Economic Outlook no. 1189-1190 |Macroeconomic, Risk and Insolvency Outlook
The austerity policy is likely to be maintained, but the uncertainty over- hanging the post-Monti government tilts risks to the downside in the short term. The Italian government has revised downwards its targets for the consolidation of public finances to -2.6% of GDP in 2012 (compared with -1.6% previously) and -1.8% in 2013 (com- pared with +0.5% previously). Austerity will therefore be maintained, albeit at a more moderate pace. In addition to spending cuts, the 2013 budget plans for a few household relief measures, including an income tax cut for the poorest classes. Our scenario assumes a -0.5% deviation from the stated objec- tives in 2013, with our growth forecasts being more pessimistic. While, in light of the reforms initiated by the Monti government, we do not believe this deviation from the objective will ham- per the sustainability of the Italian public debt, the uncertainty overhang- ing the incoming government tilts risks to the downside.
Business investment will continue to retreat in 2013 before picking up again in 2014. Leading indicators are downbeat in the short term. On the supply side, confidence surveys remain at lows and the capacity utilization rate continues to decline. Moreover, demand remains sluggish both in the domestic market and in the country’s main trading partners, most of which
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are European. In the longer term, the structural determinants point to a gradual recovery. With a view to encouraging investment, the business environment has been improved through: (i) the liberalization of some sectors of the economy, notably trade and more flexibility in the labor market; (ii) the introduction of tax incentives for innovation (research tax credit) and hiring (reduction in employer contribu- tions); (iii) company law reform in order to encourage start-ups and pre- vent bankruptcies further upstream. All in all, after a decline of -0.4% q/q on average over the first two quarters of 2013, we expect a slight upturn in investment of around +0.2% q/q on average over the last two quarters of 2013. In 2013,insolvencies are expected to continue to rise (+2%), although at a slower pace than in 2012 (+3%).
Household consumption is likely to continue to fall in 2013 but to stabilize in 2014. The unemployment rate con- tinues to rise, reaching 11.1% in October compared with 9.7% in January, while real incomes continue to contract. This dynamic should con- tinue in the short term, given the weak outlook for both supply and demand in the short term and the persistence of high inflation after the 1 pp hike in the VAT rate scheduled to be implemented in July 2013.
Foreign trade will continue to act as a cushion in 2013. In line with the fall in domestic demand, imports are expected to fall once again in 2013. Exports should continue to grow, as the Italian economy benefits from an export-efficient industrial structure (diversified product range and trading partners). 2014 is likely to see both components rebound, following a faster increase in exports benefiting from the innovation drive and a resumption in growth in investment, but also renewed growth in imports in line with an improvement in domestic fundamentals._MI
To watch…
>Parliamentary elections probably in February 2013 as they will give confirm or not the willingness to pursue Monti’s reforms. >Trend in public finances. >Trend in EZ demand._