Italy Prometeia Brief

Transcription

1 prometeia associazione Italy Prometeia Brief February 2015 No. 15/1 Executive summary Three recent positive developments (the fall in oil prices, the euro depreciation, and the launch of the ECB s quantitative easing programme) are likely to put an end to the three years of recession Credit conditions are easing, setting the stage for an improvement along with the economic recovery Nonetheless, the recovery is weak and could be easily derailed by policy uncertainties at euro area level or negative global shocks Our two InFocus sections this month are on quantifying the effects on Italian growth of the three recent positive shocks and on assessing the risks coming from the recent events in Greece GDP and inflation The recovery seems to be finally on its way. This outlook reflects the combined effects of three positive shocks: the oil price drop, the ECB s quantitative easing (QE) programme, and the euro depreciation. Thus, our GDP forecast has been revised upward: growth is expected to reach 0.7 percentage points on average in 2015, to accelerate to 1.4 per cent towards the end of the year and to stabilise at that level in Inflation is expected to be slightly negative (-0.2 per cent) this year, for the first time in its post-wwii history marked the third consecutive year of recession for Italy (-0.4 per cent; Tables 1-2), as the positive contribution from net exports was more than offset by the decline in domestic demand. In 2015, we expect a positive contribution from both the domestic and external components. Household consumption (expected at +1.1 per cent in 2015) should benefit from the increase in real disposable income (+1.9 per cent), partly related to the fall in oil prices (which dominates the effect of the euro depreciation on the CPI). The ECB s QE programme and the resulting support to aggregate demand should help also investments in machinery (+0.4 and +3.8 per cent, respectively, in 2015 and 2016). Construction is set to remain weak in 2015 (expected to drop by another 1.7 per cent) and rebound in 2016 (+1.8 per cent). Although the euro depreciation (see below) will strengthen exports (+4.9 per cent in 2015), the effect on the trade balance is likely to be partially offset by a simultaneous increase in imports (+4.4 per cent). The recent dive in the oil price (-40$ per barrel over the last three months) contributed to the fall in both CPI and PPI in the last quarter of 2014 (-0.2 and -0.7 per cent q-o-q, respectively) and is expected to carry over for the whole of But even if energy goods are the major sources of deflation, core inflation is still very low (+0.6 per cent), as in the largest euro area countries. Only in 2016 the expected oil price recovery and the effects of the ECB s expansionary monetary policy are likely to produce a comeback in inflation (expected at +1.2 per cent). Table 1 GDP growth quarterly profile 2014q4 2015q1 2015q2 2015q3 GDP (% change qoq) in bold historical data.

2 2 Italy Prometeia Brief prometeia Public finances The Government is trying to sustain the recovery by providing a modest fiscal stimulus while at the same time fulfilling the European fiscal rules. The 2015 Stability Law approved on 22nd December entails a worsening of the deficit with respect to the baseline of 5.8 billion, slightly below our expectations. The 2015 Stability Law is aimed at providing an expansionary fiscal policy mainly supporting firms and households disposable income. Specifically, the regional tax on business activity (IRAP) will be reduced by 2.7 billion. Also, new employees hired with permanent contracts will be exempted from social security taxes for three years ( 1.9 billion). Workers will be able to cash in advance flows accruing to individual severance payment funds (TFR) and the subsidy introduced in May 2014 for low-income workers has been declared permanent (the 80 monthly bonus, overall 9.5 billion in the year). In addition, low-income families will get a new-born child bonus of 80 monthly ( 0.2 billion). To cover these expenditures, among other measures, the Stability Law reduces costs (current expenditures) at the central level ( 1.2 billion), lowers transfers to the subnational government levels ( 5 billion) and strengthens the fight against tax evasion ( 3.3 billion). Despite the Government sets the target primary surplus at 2.0 per cent of GDP and the budget deficit to 2.6, we expect that the budget deficit will remain at the 3.0 percent level, even considering a lower debt service of 0.1 per cent of GDP, due to the lower expected yield from the spending cuts. Overall, the impact on GDP growth of the 2015 Stability Law is expected to be limited, at about 0.2 percentage points. Credit and banks The credit market shows some improvement from both the demand and the supply sides, supported by monetary policy measures. The Bank Lending Survey for the fourth quarter of 2014 shows, for the first time since the end of 2011, an increase in the credit demand coming from larger companies, mainly to finance stock replenishments and working capital. Household demand for loans is growing as well. Credit supply conditions have eased due to an improvement in banks liquidity, greater competition among banks and a perception that risk has decreased. This has led to a reduction in interest rates on new loans to businesses of about 7 basis points, reducing the spread as compared to the EMU average level. The latest data suggest that the minimum of the credit cycle has been reached. In particular, an increase of approximately 0.9 billion in loans to both households and companies occurred in December 2014, with a yearon-year rate of change respectively equal to -0.9 per cent (in line with the previous month) and -2.4 per cent (-2.7 per cent in November). In 2015, the upswing in economic activity coupled with the expansionary monetary policy should support a growing demand for loans. We expect loans to firms to increase by 2.3 per cent this year and to accelerate thereafter. Table 2 Italy: macroeconomic scenario (% change) GDP Consumer prices Imports Household disposable income Household consumption Total employment Government expenditure Gross fixed capital formation: General government fiscal balance* machinery and equipment Structural balance * constructions General government debt* Exports year government bond yield * % of GDP National Accounts Aggregates are ESA 2005.

3 prometeia February Risks to the projection Prolonged negotiations at the euro area level to solve the Greek standoff or doubts about the effectiveness of the ECB s QE programme to re-anchor inflation expectations to levels close to 2 per cent could fuel uncertainties regarding the euro area policy stance and weigh on the economic recovery On the global front, negative shocks could come from a change (unlikely at this moment) in Saudi Arabia s stance regarding oil production with possible sharp recoveries in oil prices, a further slowdown in large emerging economies (China, Brazil), or a worsening of geopolitical situation (the Russia-Ukraine and the Libyan crises) We see two main domestic risks: the first is related to a late reaction of employment to the upswing in activity and its negative impact on the propensity to consume; the second is related to political developments that could lead to early elections with consequent delays to the government reform agenda InFocus Oil + QE + euro: three tailwinds for the recovery In this issue of InFocus we assess the effects of the three recent positive shocks on the Italian economy using our econometric models. Oil price shock. Oil provided the major contribution to the decline in both PPI and CPI inflation during the last quarter of As a net oil importer, Italy is already benefiting from the fall in the oil price on both the demand and the supply side. As the lower oil price continues to transfer to final energy prices (-5.9 per cent expected in 2015) and to production costs (the price of energy for industrial use is forecast to fall by 11.3 per cent in 2015), this will have positive effects on households disposable income and firms profits. To give an idea of the quantitative effects, the macroeconomic model for the Italian economy has been simulated with an oil price at around $53 per barrel over the projection horizon. Although the drop in PPI and CPI (by, respectively, 5 per cent and 1.6 per cent in 2015) would translate into lower wage growth, the effect on real disposable income would result in an increase of 1.3 per cent in both 2015 and 2016, pushing consumption up by 0.5 and 0.8 per cent, respectively in 2015 and 2016 (higher in 2016 due to lagged effects). The overall effect on GDP growth of the oil shock is estimated to the tune of about 0.4 percentage points in 2015 and 0.8 percentage points in Quantitative easing. Starting in March 2015, the QE programme will imply purchases of Italian government bonds, ABS and covered bonds of about 130 billion over two years. By pulling the long-run yield curve downward, this liquidity is expected to make households and firms loan requests more attractive, reducing their risk-return ratio and inducing banks to increase their exposure to these assets. The improvements in the access to credit should help the recovery of aggregate demand and reduce deflation pressures. Our DSGE model suggests that the short-term effect of QE will be to reduce long-term yields by about 100 basis points, leading to a 0.5 per cent increase in loans to firms. This would cause investments and consumption to rise by 4 per cent and 0.12 per cent, Figure Effects on 2015 Gdp growth of the three positive shocks (% diff. from baseline) Oil QE Euro

4 4 Italy Prometeia Brief prometeia respectively. Overall, QE is expected to have a positive impact of about 0.6 per cent on Italy s GDP. Euro depreciation. The euro has depreciated by around 17 per cent relative to the US dollar from last summer. The long-awaited euro weakening was mainly triggered by the ECB s latest unconventional policies (TLTRO, QE). Even if the effective exchange rate depreciated much less (6 per cent), based on our models the effect is not trivial. Indeed, we run a joint simulation of our macro-econometric models of the Italian economy and the international economy, linked in order to assess not only the direct effect of the depreciation on the Italian economy, but also the indirect effects coming from the reallocation of trade flows around the world. Even if we expected already a depreciation in our last outlook, the difference is not negligible and can explain higher exports (+1.5 per cent) and higher investments in machinery (+0.4 per cent relative to the baseline scenario). The effect on household purchasing power, by contrast, would be the net result of higher imported inflation (imported goods being relatively more expensive, diminishing real disposable income) and higher real disposable income (due to higher export demand). The second effect dominates, and the rise in imports partially attenuates the positive effect on GDP coming from higher exports. The overall effect on GDP of the Euro depreciation by 20 per cent is estimated at+0.2 per cent relative to the baseline. Taking these exercises at face value and without considering other factors, the positive tailwinds from the three shocks would add 1.2 percentage points to Italy s GDP growth in Without these factors the Italian economy would likely have remained in recession also in Is Greece again a risk for Italy? After the nervous electoral campaign, the Greek negotiation is still very open. The question is, to what extent and in which areas does this pose a risk to Italy? Greece still has the problem of financing its overall budget deficit from official lenders as its market access is still impaired. Yet Greece has a primary surplus and the overall deficit depends only on the interest to be paid on the debt. As austerity affects the domestic population and debt is mostly owned by foreign institutions, the incentive to renegotiate the official debt is strong. Italy s direct exposure to Greece is not negligible. The Italian public sector owns around 42 billion in Greek public bonds ( 10.6 billion as bilateral loans, 27 billion through the EFSF, 4.2 billion as part of the EFSF programme to help the recapitalization of Greek banks, other than as a member of the IMF and excluding the share of the ECB holdings, estimated in around 0.9 billion and 3.4 billion respectively). Nevertheless, these sums are already part of Italian public debt, the cost of which is due, apart from potential losses, to the difference between Italy s borrowing costs at the time when the debt was issued (in , around 5.8 per cent) and the return on Greek bonds, which is almost nil because of the 10-year grace period and a reduction in interest rates. By contrast, private sector exposure (banks especially) is very low ( 0.8 billion), having sharply declined at the start of the sovereign debt crisis. In this context, the main risks are most likely to arise over the next six months, when several steps have to be fulfilled and the road may be bumpy (as the recent ECB decision to stop accepting Greek government debt as collateral clearly shows) and negatively affect Italian sovereign bonds (as the recent turbulence shows, although this was still limited to a few basis points). Nevertheless, medium-term risks exist as well if the time the Greek government is trying to buy is wasted without tackling the numerous structural problems that affect the Greek economy, namely corruption, clienteles, tax evasion, and low productivity of both the public and the private sector. Greece is not going to become competitive overnight and needs a deal to extend maturities on the debt to buy time to bring the economy towards a sustainable path, where GDP growth can make the debt sustainable and alleviate the social costs.

5 prometeia February Copyright 2015 by Prometeia, Bologna, Italy Disclaimer: This material is intended as a source of information and research and can not, under any circumstances, be considered as an offer or solicitation for the purchase or sale of any financial instruments. Every statement of financial markets trend is based on past and current market conditions. Any reference to future returns of a financial market does not constitute an estimate of the actual returns that the financial market may achieve in the future. The information and opinions contained herein are compiled or arrived at from sources by third parties. Prometeia does not accept responsibility for their use or make any representation as its accuracy and completeness. All rights are reserved by Prometeia Associazione. Any reproduction is authorized only if indicated the copyright owner. See more on prometeia associazione per le previsioni econometriche via g. marconi 43, bologna, italia tel fax info@prometeia.com based on data available on 16 February 2015 contact person: Stefania Tomasini tel