Italy Prometeia Brief

Transcription

1 prometeia associazione Italy Prometeia Brief November 2014 No. 14/7 Executive summary Italy s GDP growth forecasts have been revised downwards again: we now expect a deeper decrease (-0.4 per cent) in 2014 and a lower rebound (0.5 per cent) in The Stability Programme for 2015 has been just released: it foresees a mildly expansionary fiscal stance for next year, less so than initially announced. Even though the results of the ECB comprehensive assessment were not surprising, the need for more capital on the part of some Italian banks may drag on the expected recovery in credit supply. In the two InFocus sections we discuss (i) the different causes underlying the weaker-than-expected growth outlook, and (ii) how a public investment plan at the European level can be designed to maximise the impact on growth. GDP and inflation Our GDP growth forecasts have been revised downwards once more: we now expect a deeper decrease (-0.4 per cent) in 2014 and a lower rebound (0.5 per cent) in The recovery will be mostly driven by euro depreciation and by a mildly expansionary fiscal policy. However, growth is expected to remain weak. During the last year and a half there have been signs, mainly coming from survey data, of a likely upturn in GDP growth. However, the actual data suggest that the GDP decline has now persisted into the third quarter (-0.3 per cent q-o-q in our estimation) and is expected to end only in the fourth (0.1 per cent). The only domestic demand component which has moved slightly upward over the last year has been private consumption, expected to grow by 0.2 per cent in 2014 and by 0.7 per cent in 2015, supported by the (mildly) expansionary policies announced by the government (see below). Investments are now not expected to rebound until 2016: after a new drop in the first half of 2014 (by around 1 per cent per quarter), they are expected to decline by 2.2 per cent this year and by 0.4 per cent in Expectations of a turnaround and the improvement in credit conditions will drive up investments in machinery in 2015, but not enough to compensate for the expected fall in construction. Exports should fare better in 2015 (3.4 per cent) on the back of a more favourable euro exchange rate. The Ukraine/Russia crisis should have only a limited effect on Italian exports, below 0.1 percentage point (see InFocus). Inflation, negative in September for the second consecutive month, increased in October (0.1 per cent m-o-m), due to a combination of a fall in imported goods prices and very weak domestic inflation (0.5 per cent). We expect the rebound to continue in the next few months, although inflation is likely to remain below 1 per cent in Table 1 GDP growth quarterly profile 2014q2 2014q3 2014q4 2015q1 GDP (% change qoq) in bold historical data.

2 2 Italy Prometeia Brief prometeia Public finances Due to the worse-than-expected GDP figures, in the update to the Economic and Financial Document (DEF), the budget deficit for 2014 has been revised upwards (to 3 per cent from the previous government target level of 2.6 per cent, in line with our forecast in the September 2014 Brief). As stated in the recently released Stability Law, government goals for 2015 remain an expansive fiscal policy, implementation of structural reforms and, in general, the fulfilment of European budget requirements. In the recently released budget law for 2015, GDP is expected to grow at a rate of 0.6 per cent. A recent (informal) agreement with the European Commission foresees a reduction in the 2015 expansionary fiscal effort from 10 billion (as stated in the DEF update of early October) to 5.9 billion. Budget measures will be aimed at supporting households and firms disposable income (i.e. the 80 bonus, the possibility to cash in advance the flow accruing to individual severance payment fund - TFR, the reduction of the regional tax on business activity - IRAP), whereas the financing will be mainly derived from expenditure cuts. This mix of measures will probably have a limited expansionary effect on GDP, estimated at 0.1 percentage point. Due to the subdued growth, the major weakness of the Italian public finances remains the overall level of the public debt-to-gdp ratio, which will further increase in 2015, according to our forecast. 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 Credit and banks Recent data point to improving credit conditions, and we expect this trend to gain momentum next year, favoured by ECB TLTROs and by the end of the comprehensive assessment procedure. But risks still persist. September data still show negative credit flows to both households and non-financial corporations, but at a lower rate (-0.8 per cent after -1.2 per cent in August). In particular, loans to non-financial corporations decreased, year on year, by 0.7 per cent (-1.3 per cent in August), while the fall in lending to the household sector remains at the August level (-1.1 per cent and -1.2 per cent, respectively). The last Bank Lending Survey, which refers to the third quarter of 2014, shows that credit to non-financial corporations is increasingly constrained by weak demand, while household demand for credit remains positive for house purchases and negative for consumer credit. Credit supply conditions are generally stable for nonfinancial corporations, but differ according to firm size: only the largest companies enjoy less restrictive lending conditions. In September, the cost of credit for Italian firms was stable at the previous month s level (2.97 per cent for new loans), about 50bp lower compared to the end of last year, but still well above lending rates observed in the other core European countries (and 66bp higher than the European average, Figure 1). The take-up of liquidity by Italian banks under the first TLTRO was well below expectations ( 23 billion versus a potential allotment of 75 billion). This probably reflects a preference on the part of the banks to wait for the end of

3 prometeia November Figure 1 Interest rate for new business loans (%) per cent Sep-08 Sep-10 Sep-12 Sep-14 Italy Germany France the ECB s comprehensive assessment before absorbing more ECB liquidity. The results of the assessment, published on 26th October, were broadly in line with expectations, so we project a significantly higher take-up in the December TLTRO. The comprehensive assessment, which had a cut-off date at the end of 2013, showed that among the 25 banks with a capital shortfall nine were Italian. However, taking into account the issuance of capital instruments already undertaken in 2014, only two (Monte dei Paschi and Carige) remain problematic. These two need an additional 2.9 billion in capital, as opposed to the 25 billion surplus of the remaining 13 banks. The assessed capital shortages refer to the stress test procedure, i.e. the risks of losses related to the possibility of further weakening of the economy. This procedure did not sufficiently take into account financial risks and in this respect it was stricter with the more credit-oriented banks (like the Italian ones) as opposed to those more oriented towards financial markets (like northern European banking systems). Actually, at the start of the financial crisis in 2007 Italian banks were clearly undercapitalised. The progress made ever since by some banks, even if insufficient and slow, has been quite relevant. Risks to the projection There are substantial uncertainties relating to euro area and EU policies. Will the ECB forcefully implement the asset-backed securities programme and commit to doing more if necessary? Will the investment plan at the EU level (see InFocus below) take off or will it be derailed by bureaucratic procedures and long drawn-out negotiations on where/how to allocate the money? Political risk relating to the intricate political landscape in Italy is on the rise. This could feed uncertainty and neutralise the modest growth effect provided by the mildly expansionary fiscal stance. The Ukraine/Russia crisis has so far had only a limited impact on Italian exports (see InFocus below), but it has the potential to escalate and feed financial market volatility and deep the real sector effects. InFocus The missed recovery: an assessment of the causes The global economic recovery, which was supposed to trigger recovery in Europe in 2014 and take Italy out of recession, did not materialise. A number of negative phenomena have emerged: stagnation in international trade, coupled with depreciation in many emerging economy currencies, reduced global demand. This has added to geopolitical tensions in Eastern Europe, with the escalation of US and EU sanctions on Russia and Russian counter-sanctions fuelling uncertainty, reflected among other things in the deterioration of household and business confidence indexes during the summer. In order to assess the impact of these different factors, we ran some simulations with Prometeia s macro-econometric models.

4 4 Italy Prometeia Brief prometeia Russia s exports account for 1.7 per cent of the world total, while Germany and Italy s exports to Russia make up approximately 3 per cent of their total exports, slightly above the EU average (2.5 per cent). The sanctions and counter-sanctions (freezing of financial assets, stopping of transactions with banks and of products for military use and for the Russian oil industry, embargoes on imports of a wide range of food products) affect goods and services for about 0.14 per cent of EU exports to Russia. In the simulation exercises we assessed all these factors jointly (i.e. the weakness of the currencies of the emerging economies in the first half of 2014, the weakening of the dollar against the euro over the same period, the difficulties affecting the Russian economy, the sanctions against Russia and Russia s embargo on food products) and found that overall they broadly halved euro area growth for the first half of Net of these phenomena, in fact, euro area foreign demand could have increased by slightly above 4 per cent (2.7 per cent observed in the first half of 2014). The largest effect is related to the strength of the euro (with respect to the first half of 2013), which alone would account for about 0.8 percentage points (i.e. growth in the first half of 2014 could have been 1.6 per cent vs. 0.8 per cent observed). For Italy, the overall depressing effect amounts to 0.6 per cent: according to our calculations, without these negative elements Italian GDP would have recorded a small increase in the first half of 2014 (+0.3 per cent). Forgotten virtues of an expansionary fiscal policy Is the painful stagnation of the Italian economy, coupled with that of the euro area, really an inevitable destiny? Our simulations show that expansionary economic policies could boost growth without increasing the public debt-to-gdp ratio, provided that they are implemented at the euro area level and properly allocated among countries. This view is shared not only by many economists but also by the IMF, which, in the recently released World Economic Outlook (WEO) for October, highlights the widespread lack of infrastructure in emerging as well as in advanced countries. The WEO argues that the present situation of low aggregate demand, high unemployment, low inflation, interest rates at historic lows and the commitment of the monetary authorities to keep them unchanged for a long time, constitutes an ideal opportunity to undertake a comprehensive deficit-financed public investment programme. European leaders, who have long discussed a plan for investment, still have not reached a consensus. We ran two simulations using Prometeia s international model in order to assess the effects of a 110 billion Table 3 Public spending increase: effects on selected euro area countries (% deviations from baseline) a) distributed according to the relative share of national GDP in the EMU GDP public debt (% of GDP) billion % of GDP GDP b) distributed towards helping countries harder hit by the crisis public debt (% of GDP) billion % of GDP Italy Germany France Spain Ireland Greece Portugal EMU

5 prometeia November investment plan at euro area level, a package similar in size to that proposed in the Juncker plan ( 300 billion over three years but at EU level). The use of the international model allows us not only to evaluate the effects of such a policy, but also to assess its distribution among different countries. In fact, we found that the increase in demand should be widespread to maximise its effects: in an open economy, the share of domestic demand met by imports tends to reduce the multiplier effect (first simulation below). However, given that fiscal multipliers would be larger in the countries more heavily hit by the crisis and with larger output gaps, overall euro area GDP would benefit more from targeting the stimulus to crisis-hit countries (second simulation). In the first simulation, fiscal stimulus equal to 1.1 per cent of euro area GDP ( 110 billion each year) is distributed according to the relative share of national GDP in the EMU (Table 3a). The additional spending would increase euro area GDP by 1.15 per cent (equivalent to 126 billion). The public sector deficit would deteriorate by about 1 percentage point of GDP, with no effect on the public debt-to-gdp ratio. In the second simulation, rather than being evenly distributed, the stimulus is targeted towards helping countries harder hit by the crisis (Table 3b). In this scenario, the 110 billion stimulus would increase euro area GDP by 1.39 per cent ( 153 billion), as fiscal multipliers are higher in those countries. While the worsening of the public sector deficit is similar (about 1 percentage point of GDP), public debt as a percentage of GDP would fall slightly as in countries with high public debt the deficit increase would be more than offset by the GDP expansion. Copyright 2014 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 13 November 2014 contact person: Stefania Tomasini tel