Prometeia presents today in Bologna the Forecast Report (January 2012) on short-medium term prospects of the international and Italian economy. This Report, drawn up every quarter since 1974 by Prometeia Associazione, is recognized as one of the most important moments in the analysis of the international economy and of our country.
Last October Prometeia had considered the situation of our economy as the central node of the European situation and the European situation at the center of what could have happened in the world. In recent weeks, Italian politics and economic policy have undergone a radical change. But the measures taken so far by the Monti government, if on the one hand they satisfy the necessary conditions to remove the risk of default from the horizon of our public debt, on the other they do not constitute sufficient conditions to drastically reduce the differential between the yields of the BTPs and the XNUMX-year bunds.
The risks deriving from our public debt have been highlighted by the progressive loss of political credibility over the last three years: walking the path in reverse will take a long time. Time that will be marked by the phase of recession and stagnation that is now developing and will last until 2013, from the recovery that may occur in 2014 depending on the intensity with which the measures to reduce entry barriers will be applied and extended in the various markets protected by international competition and by the complicated readjustment of the credit system to the new normality and by the possibility of avoiding a real credit crunch.
In the meantime, a slow convergence of views has been set in motion on the conditions that would allow Germany to be more open to bailout actions for peripheral countries without this generating the risk of opportunistic behavior by them or others in the future: the so-called fiscal compact.
Furthermore, the negotiations for the second tranche of aid to Greece seem close to a conclusion. The voluntary reduction of the value of their claims on the Greek government by financial institutions could approach 70 per cent and the rate on the maturing debt between 3.5 and 4 per cent depending on the time horizon considered. This would ease both social tensions in Greece and financial tensions in the sovereign debt markets.
Prometeia believes that these small economic and institutional advances have paid off the possibilities of splitting the single currency are negligible, even if in Anglo-Saxon circles this eventuality has certainly not left the horizon of operators. In fact, the recessionary scenario that lies ahead for Europe is another important change, this time negative, compared to the October forecasts; this change in the forecast framework for Europe takes place in the face, however, of slightly improved forecasts for American growth.
The European recession, driven mainly by domestic demand, will not be without effects, especially on emerging countries, which are already feeling the effects of the restrictive monetary policies implemented to deal with inflationary impulses from abroad, policies which are now easing , to which will be added the effect of lower demand from Europe. Brazil, Russia and the countries of Central Europe seem to be the hardest hit, while for China the risk of a possible sudden slowdown remains. Overall, world trade will experience a deceleration in its growth that is certainly not negligible and, as usually happens, greater than the deceleration in world GDP growth.
Compared to the October forecast, the revision of the fall in GDP in 2012 is undoubtedly substantial: from -0.3 per cent to -1.7 per cent, followed by a more modest revision for 2013 from +0.6 to +0.2 per cent. Finally, the outlook could be brighter for 2014 when, instead of a 0.9 percent growth expected in October, we now expect a 1.5 percent recovery. Unlike what happened in 2008 and 2009, the current recession is mainly due to the trend of domestic demand and consumption in particular. In fact, the dynamics of our exports is currently sustained and we should close the 2011 national accounts with an expansion of 6.2 per cent after the 12.2 per cent growth of 2010, thus recovering about 15 of the 20 points lost in the two-year period 2008- 2009.
During 2012, the growth of exports will slow down to 1.2 per cent as a function of the slowdown in the growth of world trade. Different and more worrying is the dynamics of household consumption. Household spending in real terms has been declining for two quarters now and we expect it to continue to fall for another six quarters, up to mid-2013. This represents an overall reduction in consumption of 4.5 per cent between summer of 2011 and the summer of 2013, a much higher correction than that which occurred between the end of 2007 and the beginning of 2009, when it did not exceed 3 per cent. Among these trends, food consumption is very significant, the negative performance of which, after having lasted for ten quarters in the two-year period 2008-2009, will be repeated for as many quarters in the period 2011-2013. In real terms, food consumption at the end of 2014 will still be 2007 per cent lower than at the beginning of 9.6.
Faced with these radical changes in consumption levels, there is a dynamic of disposable income in real terms which continues to fall from 2008 to 2013. After seven years, in 2014, when its trend will be positive again, the disposable income of Italian households in real terms will be 7.8 per cent lower than in 2007. Overall, during this long crisis, in the years 2007-2014, the attempt to limit the reduction in consumption standards achieved before the crisis will have led to an increase in the propensity to consume by about five points in 2014, approximately from 87 to 92 percent of disposable income. The increase in the propensity to consume obviously has repercussions on the formation of real and financial assets. The reduction in investment in new homes and renovations has contributed and will contribute in the coming years to thenegative cyclical trend in the building sector.
A cycle of falling investments in construction which started at the end of 2007 will also end in 2014 and of which residential investments have been and will be an important negative component. It is understood that it is not only the lower formation of real savings that limits the demand for new homes or renovations, also the changed credit conditions have acted and will continue to act in that direction.
La less savings formation, but above all its loss of value on the financial markets, have reduced household net financial wealth by 2006 per cent in real terms compared to the end of 23.4; in 2012 the fall will reach 24.5 per cent, followed by a recovery of just over 4 per cent in the following two years.
Another component of disposable income that has acted negatively in recent years and will do the same in the next is employment. Between 2008 and 2013, around 650 people will have lost their jobs, while the number of jobs (work units) will have decreased in the same period by almost 800 units, of which around 700 in the industrial sector. The difference is attributable to the use of the Redundancy Fund.
Families have therefore been the hardest hit by the crisis and will continue to be so in the coming years. In addition to the labor market and the financial markets, public finance has had and will have an impact on the reduction in disposable income. The set of measures that were taken during 2011 and will exert their innovative effects in 2012 and 2013, going into effect in several cases in 2014, envisage a correction of 81 billion euros, of which 49 in 2012. 74 percent of the cost of the interventions will be borne by families.
The case of companies is different, for which the Irap relief and the adoption of the Ace should avoid a marked fall in investments in machinery and plant. The necessary condition in this case is in any case constituted by the possibility for medium-sized companies to be able to access bank credit being, given their size, unable to finance themselves directly on the capital market.
The considerations advanced above on the probable evolution in a non-negative sense of the European institutional scenario are at the basis of the forecast that during this year the Btp – Bund differential will drop to 360 basis points, but given the uncertainties that will most likely continue to weigh on sovereign debt, also as a result of the European-wide recession, Prometeia does not believe that it can be seen to fall below 300 bp in the following two years. Under these conditions, the average cost of debt will rise by one percentage point over the three-year period and the overall burden of interest will come close to 2014 billion euros in 100, or 5.9 per cent of GDP; it was 4.5 percent in 2010.
A fifth of the fiscal effort will go to the higher interest burden and a tenth will be burned by the 2012 recession and 2013 stagnation. As a result, the primary surplus, already positive in 2011 for 1 per cent of GDP and which will first rise to 4 per cent in 2012 and finally to 5.7 per cent in 2014, will not be able to guarantee the achievement of the objective of a zero effective deficit in 2013.
The scenario for the Italian economy contained in this Report takes into account, albeit on a preliminary basis, the interventions to reduce entry barriers in various sectors of economic activity. As Prometeia has highlighted for some time, the effects of this prolonged crisis will see the development of a third phase of restructuring of the industrial sector, after those of the early eighties and nineties. In any case, it will take four or five years to unleash an effect on the level of GDP equal to 1.7 percent.
