“If not now when?” he asks Gregorio De Felice, prudent but not fearful Head of research and chief economist of Intesa San Paolo, faced with a situation that finally offers the opportunity for a significant step forward on several fronts, from the inflow of risk capital into companies to a more virtuous cycle of public debt. Let's be clear: this is not the time for "revolutionary" interventions, but for consistently putting to use the work done in these difficult years, when many (but not De Felice) despaired that Italy could get back on top. On the contrary, not a day goes by these days without some positive notes on the Italian economy: production, industry, GDP growth, decline in bank bad debts and so on.
All good, perhaps too much, Dr. De Felice. Isn't there a risk that something could go wrong?
“Let's start with the risks. The most insidious concerns a possible Chinese bubble triggered by very strong credit growth. A similar phenomenon was at the origin of the Thai bubble which led to the Asian crisis, as happened in the USA with subprime or the excesses of the Spanish real estate market. If we think of the growth of investments in the West, which have certainly not been limited to the purchase of Milanese football teams, the impact could be significant, but let's not forget that Chinese capitalism has particular characteristics. The strong presence of the public footprint makes the crisis phases more manageable”.
Apart from China?
“The other possible source of concern is US trade policy. If Donald Trump in fact confirms the protectionist approach promised in the campaign and never denied, the risk of chain reactions will become tangible because protectionism is never unilateral. As the world already experienced in the XNUMXs, in that case everyone loses out. Finally, we cannot forget the geopolitical tensions that can introduce elements of instability".
Once the risk factors have been exhausted, however, one has the feeling that at the moment the list of positive elements is long. Is that it?
“We are experiencing an unusually long expansionary cycle, the second since the post-war period in terms of duration. But for the first time, growth is accompanied by very low inflation rates. The normalization of the cost of money is destined to proceed very gradually everywhere”.
Even in the US?
“According to our forecasts between now and the end of 2018, the Fed will raise rates, very gradually, three times”.
And what will the ECB do?
“The European Central Bank is not really thinking about raising rates. Maybe there will be a little tweaking in 2019, but not before. Mario Draghi is too conditioned by the upward pressure on the euro. Or maybe he lets himself be conditioned without too many regrets ”.
However, the first complaints are already being raised about the impact of the strong euro on exports. Is it worth worrying?
“Our exports to the dollar area represent approximately 13% of the total against approximately 50% to our partners in the Eurozone. The impact on GDP of the pressure on the exchange rate could be around 0,1%-0,2%. A not negligible percentage, given that growth fluctuates around 1,4%, but sustainable”.
In short, the scenario is positive. Is that it?
“Foreign factors are favourable. But this is combined with a positive attitude towards the domestic, moderately expansive economy. The system has reacted: the signs on the recovery of employment demonstrate this. I just saw a Manpower survey showing a 3% increase in corporate demand for staff. Meanwhile, confidence is rising, both in households and in businesses. And the investments have restarted. Not just in transportation. We will soon see the return of the Industry 4.0 Plan, from super depreciation to R&D relief. A package of interventions worth 15 billion in two years”.
Is there anything to be confident about the near future, then?
“The industrial system can count on incentives to invest, both on low rates and, last but not least, on the need to remove the obsolescence of machinery which has an average life of 13 years. Without forgetting that the system already has a good trade surplus today”.
And the sword of Damocles of the credit crisis no longer weighs, at least in the past. Is it archived?
“Let's say that after the bailout of the Veneto banks there is no longer talk of systemic risk for Italian banks. There is still a significant risk that we share with the rest of the European system: profit margins remain low as does money management performance. Above all, however, it is necessary to price the huge investments in technology also necessary to respond to the requests of the regulators”.
In this framework, concentrations seem inevitable. Will they be done?
“I sincerely hope you say yes. It is the only way to face the increase in costs”.
Even at European level?
“It is highly desirable and reasonable in the face of greater integration. But first we need to solve the knot of guarantees on deposits and other aspects, today subject to different legislations”.
Meanwhile, as demonstrated by the recent survey on savings by the Einaudi Center presented by Intesa Sanpaolo in recent days, Italians continue to save. On the contrary…
"It is our great wealth that is measured in trillions that we must defend with the utmost attention".
Were you expecting the PIR boom?
“In all honesty it exceeded my expectations. It is the confirmation of the appeal on savings of the tax treatment. Now it is necessary not to squander this resource: in order for the system to work properly, the supply of listed companies must be adapted to the demand”.
Will it be the right time?
“I have the sensation, or rather something more than a sensation, that in 2018 the offer of new companies on the market will grow significantly, thus helping to remove an Italian anomaly, a country where only bank credit has been used. But textbooks teach us that the bank should be used to finance business. For everything else you have to rely on risk capital and medium-long term bonds”.
Will it be the right time?
"If not now, when? The premises are favourable”.
The risk is political. We are heading towards a complicated electoral season that could have a decisive impact on debt. Will it go like this? Or, as happened in Spain, will the economic recovery continue anyway?
“I don't make political predictions but I can see that the situation is much more solid than in 2011/12. Banks' exposure to foreign funding fell to 20% from 50% at the time. The share of public debt in the hands of the banks has dropped from 430 to 70 billion. Other data show that the financial situation is now much more solid than five years ago. Electoral uncertainty can be a pitfall. But, all in all, Holland has been waiting for a new government since March”.
Beyond the electoral news, however, urgent interventions, if not emergencies, are not lacking.
“It would be very useful to send a signal of good will to the markets on the public debt front: we need to restart privatizations and the valorisation of a part of the real estate assets of the State and local authorities, something that is worth around 3-400 billion according to estimates . I'm not demanding much, but sales of 10-15 billion a year would have a huge effect. It is no less important to accelerate the reform of the public administration”.
And in terms of employment?
“The virtuous cycle triggered by the 4.0 program and by the other interventions will produce its effects over time. Under normal conditions I would suggest not to interfere in this process in which the benefits are at the service of the entire community. But, given the disastrous condition of youth employment, targeted resources can be diverted towards this goal”.
Today, why if not now when? Finally, an essential ingredient has returned, "We are back to breathing a climate of trust" concludes De Felice.
