As usual, Prometeia has released the March Update to the Forecast Report.
Compared to the scenario presented last January, while the slow recovery underway is confirmed for the emerging areas, the US economy and the EMU area appear weaker than expected. Looking ahead, the possible consequences of the Italian elections weigh on the latter.
The difficulty of expressing a government majority in Italy after the general elections has rekindled uncertainty in the euro area.
The first reaction was a new flight to quality towards the titles of the core Europe, to the detriment of the Italian ones and, to a lesser extent, of those of the other peripheral countries. However, this reaction was decidedly lower than what occurred in the past and has partially subsided, despite the uncertainty over the development of the Italian political situation.
However, it is premature to interpret the current quotations as permanent: we believe that the institutional maturities that will characterize the coming months and the difficulties that are likely to emerge will widen the differential between Italian and German bonds again, but without returning to the peaks of the past. Compared to then, both in terms of control of public balances and the composition of the debt, the Italian economy has made progress in a direction that we believe make it less vulnerable. At the same time, the European institutional context is also more solid and there is no lack of tools (first of all the OMT programme) to counter speculative actions.
In the meantime, economic information confirms a picture of extreme weakness for the Italian economy: 2012 closed with a drop in domestic demand of 5 per cent, the likes of which has never been recorded since the post-war period, while only exports contribute positively to GDP growth. The performance of investments (-8.6 per cent) and consumption was particularly negative: for household spending it is the worst fall ever recorded in the past, while those of the public authorities contracted to a greater extent during the fiscal consolidation of 1992-93 . The negative legacy for the current year is consistent and can be estimated at 1 percentage point.
With reference to the labor market, the data for January reveal a worrying aspect: not only did the unemployment rate rise further, reaching 11.7 per cent from 11.2 per cent in the fourth quarter, but this occurred in the face of stable supply of work and a drop in employment (-0.4 per cent). Given the time lag with which the labor market reacts to macroeconomic conditions, this signals that the recession is increasingly manifesting its effects on the labor market and that the minimum point has not yet been reached.
For the coming months, the recovery that we predicted, in the hypothesis that the elections would restore a framework of governance, is put at risk. The climate of uncertainty will affect household spending decisions and business investments, leading to a further drop in domestic demand and GDP also during the second quarter, when the tensions linked to institutional deadlines awaiting the new parliament will be stronger .
Therefore, a first half of the year still in decline while we confirm the exit from the longest post-war recession in the second part of the year. However, we are revising the growth forecasts for 2013 downwards (to -1.2% compared to -0.6% in January), not only due to the negative legacy of 2012, but also due to the effects of the uncertainty of recent months on consumption and investments. The lower growth will also be reflected in a slowdown in the deleveraging process. However, since these are cyclical effects, in our estimates we believe that the current legislation remains consistent with the objectives in terms of structural deficit.
In summary: the situation of extreme weakness affecting the real Italian economy, the level of debt which is still at 127 per cent of GDP, the numerous structural constraints on growth which still characterize our country do not support the idea that the he absence of a fully functioning government would be without consequences, as happened in the case of Belgium last year. The Italian economy needs structural reforms, in addition to those already approved, capable of relaunching growth even in the short term. However, the progress made in Italy and in Europe in the last year makes the prospects for the persistence of political uncertainty less dramatic than in the past.
