After losing 11% of GDP in the two recessions experienced during this crisis, the Italian economy seems to have embarked on a path of slow growth which, for 2014 will be 0.7%, while it may fluctuate between 1 and 1.5% in the following two years, reaching the 2007 GDP level only in 2021. Disposable income will start to grow again from this year, also dragging the change in consumption positively. The resulting increase in the propensity to save over the next seven years is the combination of two opposite effects. On the one hand, the demographic evolution and the implicit cohort effect observed in the past which shows that successive generations of the same age group have a lower propensity to save than the previous ones and, on the other hand, the fact that per capita financial wealth has decreased in these years, which pushes the more mature age groups, still at work, to the reconstitution of the previous levels.
Inflation will remain below 2%, in line with the European one. Exports will be an important factor supporting growth, even if their added value content is not high. This does not suggest reducing its weight, but rather using the internationalization of companies to increase the stimulus to innovation, which is indeed a factor supporting the formation of added value. The recovery in the formation of disposable income will come from a less restrictive attitude of the public finances, from limited inflation (also due to the absence of significant increases in energy prices) and from employment, which will start to grow again in 2015, recovering in the coming seven years, 1.1 million jobs out of the 1.9 million lost since the start of the crisis. The envisaged labor market reform should help mitigate the cost that young people are bearing in this period.
In the Prometeia forecast scenario in 2014 and 2015, a halt in the deficit consolidation path is estimated. Net borrowing of PAs is forecast at 3 per cent of GDP also in 2014 in effective levels, 0.9 per cent in structural terms, and at 2.5 per cent in 2015, with a reduction that is driven by lower cyclical effects but does not reflect a structural improvement. Ex-post, therefore, the stimulus of fiscal policies should be expansionary in 2014, for around 0.4 per cent of GDP. It derives from the reduction of the tax wedge announced by the government as early as the beginning of March and from the acceleration of investment spending, the flow of which is estimated to be 4 billion higher on average than the trend.
With the repayments of public administration debt mainly used to reduce corporate exposure to banks and having passed the stress test phase, in 2015 loans to the economy by banks will return to growth in line with the expansion of nominal GDP. While from 2019 bad debts will begin to decrease in proportion to total loans.
The scenario would be different in the case of implementation of European QE. Even having assumed purchases that are limited to public debt, the effect of reducing interest rates and above all the Btp Bund spread should favor the increase in loan/nominal GDP elasticity through the generalized reduction of the risk that the spread carries. The result also in Italy would be an incremental dynamics of investments considerably more sustained than the incremental dynamics of consumption, which would support an average higher GDP of about half a percentage point, capable of halting disinflation without significant effects exerted by the depreciation of the euro. Public finance would also benefit from this monetary policy action: net borrowing in terms of GDP would be lower on average by 0.6 percentage points each year and the public debt ratio by 4.34 percentage points at the end of the period.
Tax burden in reduction. The maneuvers hypothesized on the tax wedge reduce the tax burden in the current year and, in a relatively more marked way, in 2015 when the reductions will be fully implemented. In 2014 the pressure from direct taxes decreased, from 15.3 to 15 per cent; the new Irpef reliefs add up to the greater effects of the measures introduced by the stability law, Irpef reliefs and the effects of the Ace on business taxes. Among indirect taxes, on the other hand, the effect of the increase imprinted by current legislation will prevail in the first year, including the higher collections from real estate taxes, and the overall revenue will grow in terms of GDP from 14.5 to 14.8 percent. At the end of 2015, the weight of tax revenues and contributions would reach 43.4% of GDP and would remain constant in the following year, still reaching historical highs.
The cost of debt is falling again. After two years of sharp increases, interest expense decreased by 5.1% compared to 2012, as expected and the average cost fell to 4.1%. The savings on medium and long-term issues made in the second half of 2012 consolidated and the rates of new placements were particularly low throughout the months of 2013 and for all securities. The savings amounted to over 4.4 billion euro, and can be attributed to a similar extent to both short and medium-long term segments.
However, the conditions are not there for a sort of treasure to be obtained from the reduction in interest expense. On the one hand, the level of new borrowing requirements to be financed is high, also burdened in 2014 by further scheduled debt payments (here estimated at around 35 billion euro). On the other hand, the stock of securities maturing in 2014 has a relatively low weighted average coupon: 3.8 that of the 108.2 billion BTPs maturing this year. The greatest savings are limited to shorter-term and indexed securities, such as 24-month CTZs, for which renewals in 2014 are estimated at average rates of 1.5% against 3.1% for maturing securities; however, this is a decidedly less significant stock of securities (56 billion maturities in 2014). Interest expenditure would thus fall further in 2014 but marginally, reaching 5.2% of GDP, consistent with an average cost of the overall debt just below 4%.
In 2015 and 2016, the reduction of the spread will continue at a limited pace, slowed down in the first year by the debt dynamics and by the partial deviation from the public finance consolidation objectives: 160bp the level forecast at the end of 2015, 150bp at the end of 2016. A reduction which , however, is not reflected in a further drop in the cost of issuance, since the level of the Bund is estimated to have already increased since the second half of 2014, with the consolidation of the international recovery. The weighted average rate on Italian medium/long-term securities remains at historically low levels, also tempered by low inflation: 4.1% at the end of 2015, 4.4 per cent at the end of 2016. Expenditure on interest expense would thus return to increasing levels, however remaining constant in terms of GDP just as the average cost of debt would remain constant.
Signs of recovery in investments in machinery and means of transport. After the sharp contraction suffered during the recession, investments began to show timid signs of recovery in 2013. They concerned the demand for capital goods of companies and in particular the component consisting of means of transport. In the fourth quarter, the latter reported another sharp increase which contributed to the recovery of the economy (0.2 percentage points). Spending on machinery and equipment continued to contract but at a slower pace.
The trend in investments reflected the improvement in business confidence and demand prospects. The degree of use of the plants then moved to levels not far from those prevailing in the period preceding the start of the recession, even if lower than the long-term average. While the credit crunch does not seem to have eased, the payment of trade receivables from public administrations continued.
While not excluding the possibility of a correction in the demand for means of transport, characterized by highly erratic nature, the information for the first quarter of 2014 is generally positive. Firms' expectations on the short-term economic trend improved further. Assessments on domestic orders in the first quarter remained unchanged compared to the fourth quarter of 2013. Production in the capital goods sector presented a fluctuating trend but on average for the January-February period it stood at levels 1.9% higher than those of the fourth quarter suggesting the possibility of an acceleration compared to the fourth (0.4%). According to the expectations of companies, the recovery of productive activity should then continue in the following period.
export. The debut of exports in the first month of 2014 was certainly not brilliant, at current prices they recorded a cyclical decline both towards the EU (-1.7%) and towards non-EU markets (-1.2%). The disappointing result in the non-EU is partly attributable to energy products, net of which they actually increased slightly. The evolution of the various qualitative and quantitative indicators leads us to estimate substantial stability in the quantities of goods exported for the first quarter. During the year, they will increase by 2.6%, a little less than the growth in potential demand (3%), as a result of the persistence of the dollar-euro exchange rate on average values of 1.34. The recovery of investment demand, after two years of contraction, and the restoration of the stock accumulation process will drive the demand for imports, suddenly increasing their penetration (measured as the ratio between imports and aggregate demand). In the two-year period 2015-2016, exports will be favored by the growth of potential demand to 6% and by the weakening of the euro exchange rate; on average they will increase by 5.5%.
Worsening labor market also in this first part of the year. The most recent data show that the worsening of employment conditions continued in the first two months of the year: the unemployment rate increased further and reached the record level of 13% net of seasonal effects. Despite the forecast of a continuing and gradually strengthening recovery in industrial production and GDP, these aftermaths of the recession will continue to manifest themselves and we expect that employment will not grow until the end of the year, bringing with it a further increase in the rate of unemployment which will reach 13.4%. We therefore expect employment to grow between now and the end of 2016, recovering 300 standard work units, 370 job positions. Against the million and 900 thousand units (1 million positions) lost since 2007, we will still be far from pre-crisis levels. Just as unemployment will be far from pre-crisis levels, which will remain from the current over 3 million to 3 million at the end of 2016, 11.8% of the labor force.
