The global economic cycle continues to consolidate: +3,3% in 2017, +3,4% in 2018, despite lower-than-expected US growth.
In Italy, growth this year will be the highest since 2010: +1,2% thanks to the good global situation and the cumulative effects of expansionary fiscal and monetary policies. A window of opportunity to secure public finances and continue reforms.
These are the main themes of the Forecast Report of July 2017.
Italy forecasts
The 2017 GDP forecast has been revised upwards from +0,9% estimated in March to +1,2% in July 2017. Cumulative growth for the next 4 years up to 2020 will be 4,2%.
Debt reduction remains an obligatory path. GDP growth and rising inflation will make it possible to reduce the debt/GDP ratio by 3,5 percentage points in 2020, but less fiscal expansion will also be needed.
The improvements on the labor market will strengthen despite the end of the incentives: by 2020 the unemployment rate will drop to 10,3%.
International forecasts
After the slowdown in 2016, the impulse of foreign trade will remain sustained: +3,7% in 2017, +3,2% in 2018) read more
Downward revision of US growth prospects: +2,1% in 2017, +2,2% in 2018, in the absence of the expected fiscal stimulus.
Monetary policies at the crossroads, but central banks remain cautious in the timing and intensity of the reduction of stimuli.
Italy has recovered and is better than expected
The gust of (cautious) optimism blowing in Europe is also sweeping over Italy, keeping under wraps a political uncertainty which risks soaring next winter, but which for now has returned to low levels. Meanwhile, better data between the end of 2016 and this year "give arithmetically" to 2017 three tenths more growth in GDP. However, our analyzes suggest caution in reviewing the scenario in an overly optimistic key. The acceleration at the beginning of the year was driven by inventories, investment in construction and consumption, both private and public, with a negative contribution from net exports and capital investment, these trends going against the trend compared to the rest of Europe, where the investments and slow down consumption.
Debt relief remains mandatory
A window of opportunity that could be used to secure public finances. The growth environment and debt financing conditions are very supportive, but there are margins of risk. Although the current debt term structure makes it possible to sustain a substantial increase in its cost in the short term, the absolute size of the Italian debt represents a vulnerability in itself, especially if the country were to go through a phase of difficult governance. We therefore expect that from next year the fiscal stance will reverse from expansionary to moderately restrictive. The expected structural adjustment is around 0,8 percentage points in the three-year period 2018-2020 which, added to the improvement in the economic cycle, could support the reduction of the deficit up to 1,1% of GDP in 2020. A smaller reduction than that indicated in the official documents, which envisage effective and structural break-even from 2019. Indeed, we believe that the maneuver necessary to achieve this objective would be too restrictive and penalize growth, and the improvement in terms of reduction of the debt/GDP ratio too low: a cost - decidedly unfavorable opportunity. The same government announced at the end of May that it wanted to reduce the structural correction planned for 0,8 from 0,3 to 2018 percentage points of GDP. Four years of growth (4,2% cumulative over the 2017-2020 forecast horizon) and rising inflation, even if far from the 2% target, will make it possible to reduce the debt/GDP ratio by 3,5 percentage points in 2020.
The labor market continues to recover
Looking ahead, a mixed picture, which however should not obscure the fact that improvements in the labor market are evident and we expect them to strengthen over the forecast horizon. Employment will continue to grow in line with GDP, with only one setback, not a fall, in the pace of growth in 2018 when the tax relief on permanent contracts expires. At the end of the forecast horizon, compared to 2016, 380 work units and 480 employed persons will have recovered and the unemployment rate will have dropped to 10,3% and the employment rate will have risen to 60,5%.
World trade picks up momentum
World trade reached growth rates of more than 4% at the beginning of the year, the likes not seen since 2011, thanks to sustained growth in Chinese imports and exports of raw materials. In the euro area, the recovery of trade in the first few months of 2017 is the keystone for the consolidation of the investment cycle underlying the upward revision of GDP growth this year and next (+1,9% and +1,7% compared to respectively +1,7% and +1,4% forecast in March). However, in China the credit crunch heralds an economic slowdown in the second half of the year which will also be reflected in a lower absorption of products from abroad. This will contribute to less buoyant growth in world trade between the end of this year and next.
United States, the enigma of fiscal policy
The main doubts about the intonation of the US budgetary policy stem from the decision to reduce spending in favor of the weakest segments of the population for the adjustment of public finances which seems to have become the primary objective. A less expansionary fiscal stance underpins the downward revision of US growth in our scenario. In fact, we expect GDP to reach an average annual +2,2% in 2018 (it was +2,7% in March), to then decline in the following years.
In a context of moderate growth and low inflation, there are no additional elements to change the Fed's forecast of a slow pace in raising policy rates. In our scenario this implies fewer hikes than contained in the mid-June FOMC projections: we do not expect another hike this year, we expect two hikes of 25 basis points in both 2018 and 2019, and stable rates policy changes in 2020. The ECB is preparing the markets for a reduction in the expansionary stance of monetary policy. The economy is growing faster than expected, however inflation does not seem to be able to stabilize at values consistent with the Frankfurt target. The strengthening of the euro and the high potential supply of labor keep inflationary pressures under control, also in terms of wages, suggesting great caution in reducing the timing and intensity of monetary expansion. We confirm the first increase in the refi rate in 2019 and the continuation of QE until the end of this year and therefore a tapering which from June will no longer increase the ECB's assets.
