164 The recovery continues to rely on private demand

3.
DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES
ITALY
GDP growth is expected to reach 1% in 2016 and 1.4% in 2017. Private consumption
continues to be the main driver of the recovery. Employment growth has temporarily
slowed but real income gains and pent-up demand are supporting household spending.
Investment is turning around, providing some support to domestic demand, but
constraints on the availability of bank credit still impede a faster investment recovery.
The government has reiterated its commitment to fiscal consolidation, but at a
gradual pace, and to the structural reform programme. To generate the fiscal space for a
much needed increase in public investment and avert the hike in indirect taxes
programmed for 2017, it plans to use EU budget flexibility rules and to contain public
spending. ECB monetary policy support and gradual fiscal consolidation have stabilised
the debt-to-GDP ratio, which should start decreasing in 2017.
The collapse of investment in the wake of the crisis has exacerbated a
long-standing labour productivity slowdown. Policy priorities to raise productivity
involve speeding up the resolution of banks' non-performing loans, improving the
selection process and execution of public infrastructure projects, raising public
administration efficiency, and enhancing business dynamism and innovation.
The recovery continues to rely on private demand
Consumer and business confidence have retreated from their post-crisis peaks but
remain high. Net real household income gains, driven by rising nominal income, low
inflation and fiscal measures, along with pent-up demand, especially for transport vehicles
and other durable goods, are sustaining private consumption despite the recent slowdown
in employment growth. Producer price deflation, mainly due to declining prices of energy
Italy
Real household purchasing power is
driving private consumption higher
Index 2010=100
110
Price inflation remains low
Real private consumption
Net real household disposable income
Core inflation¹
Headline inflation²
Producer price inflation³
Y-o-y % changes
6
4
105
2
100
0
95
-2
90
2008
2010
2012
2014
2016
2011
2012
2013
2014
2015
-4
1. All items less food and energy.
2. Headline refers to the harmonised index of consumer prices and core excludes food, energy, alcohol and tobacco.
3. Industry (excluding construction).
Source: OECD Economic Outlook 99 database; and ISTAT.
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3.
DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES
Italy: Employment, income and inflation
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1 2 http://dx.doi.org/10.1787/888933369052
and petroleum-based products, weak inflation expectations and still large spare capacity
are exerting downward pressures on consumer price inflation.
After a slowdown in late 2015, the recovery is set to regain strength, driven by private
consumption and, to a lesser extent, by a moderate investment recovery. Industrial
production is trending up, with recent gains attributable to a large extent to capital and
consumer durable goods. The increase in capital goods production and the trough reached
in the construction sector indicate that investment may finally be turning around.
However, bank credit supply constraints, along with uncertainty about future demand
conditions, hinder a strong recovery of investment. The government is paving the way to
create a secondary market for non-performing loans and improve banks' balance sheets,
Italy
The rise in the production of capital goods
anticipates a gradual investment recovery
Low capital accumulation and technical progress
are slowing labour productivity growth
Q-o-q annualised % changes
20
Real gross fixed capital formation
Industrial production - capital goods
15
Multifactor productivity
Capital per worker
Potential output per worker
% changes
2.5
2.0
10
1.5
5
1.0
0
0.5
-5
0.0
-10
-0.5
-15
-20
2010
2011
2012
2013
2014
2015
2016
2017
1990
1995
2000
2005
2010
2015
-1.0
Source: OECD Economic Outlook 99 database; and ISTAT.
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3.
DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES
Italy: Financial indicators
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1 2 http://dx.doi.org/10.1787/888933369061
an important precondition to raise credit supply and investment. Sluggish external
demand has been holding back export growth, while robust private consumption has been
sustaining import growth.
Boosting productivity is key to propelling output growth
The budget deficit declined to 2.6% of GDP in 2015 and is projected to decrease further,
largely as a result of the cyclical recovery and low interest rates. The government plans to
contain public spending and fully use the flexibility available under EU deficit rules,
equivalent to about 0.8% of GDP, to raise public investment, slightly lower taxes and avert
a hike in indirect taxes previously programmed for 2017. Rationalising and reducing public
spending is a priority, but it will depend in part on raising public-administration efficiency.
Permanently lowering social security contributions, especially for those on low salaries,
Italy: Demand and output
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DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES
coupled with effective active labour market policies, and shifting the tax burden towards
consumption and real estate, based on updated cadastral value, would lay the foundations
for a stronger and more equitable growth.
Progress on the structural reform programme is contributing to strengthening
long-term growth prospects, but more needs to be done to boost productivity and
inclusiveness. The National Agency for Active Labour Market Polices, established under the
Jobs Act to coordinate and evaluate activation policies, will be key to bringing more people
into good jobs and reduce job-skill mismatch – but it has yet to become operational.
Reducing youth unemployment, which is still high, will hinge on better coordinating
education and labour market policies. Fully and rapidly implementing the Good School
reform and the Jobs Act would be meaningful steps in the right direction. Strengthening
the provision of good quality care for children and the elderly would remove barriers
keeping women from fully participating in the labour market.
Raising the efficiency of the public administration would contribute to higher aggregate
productivity. The ongoing, but only partly approved, public administration reform will
introduce a more performance-oriented human resource system, rationalise enterprises
owned by local authorities, set time limits for administrative procedures concerning large
investment projects, and extend the access to public services by electronic means. However,
implementation will be crucial. Continuing the efforts to accelerate judicial proceedings is
critical as lengthy trials undermine the rule of law and reduce investment.
Boosting the quantity and quality of public and private investment will be crucial to
make the recovery sustainable. Implementing the new public procurement code for
construction works, improving and accelerating project selection and execution, and
vigorously fighting corruption will enhance the quality of public capital spending. The
government has recently approved a decree to shorten the process of debt recovery for new
loans and existing ones – if both parties agree. Further steps in reforming bankruptcy
procedures might be needed to complement the measures already taken.
Growth is expected to regain momentum
GDP growth is projected to rise to 1% this year and 1.4% next year. Rising real
household disposable income and improving labour market conditions will buttress
private spending. Gross fixed capital formation will continue its gradual recovery and
modestly accelerate in 2017. Robust internal demand will result in imports growing faster
than exports. Inflation will remain low, reflecting continued product and labour market slack.
The recovery of investment will depend on the effects of the government's initiatives
to remove bad loans from banks’ balance sheets and create a secondary market for them.
A faster recovery than anticipated of main trading partners would boost exports and
growth. Geopolitical uncertainties in the Mediterranean region remain high; the refugee
crisis and the costs it entails will depend on how they evolve. Delays in implementing the
ambitious public investment programme and sufficiently cut public expenditure to avoid
the hike in indirect taxes, for which Italy successfully invoked EU budget flexibility rules,
would slow the recovery and worsen the fiscal position. The event of Brexit and renewed
financial market turmoil in the euro area could raise risk spreads, and debt financing costs,
requiring more fiscal restraint. Private consumption growth could be lower than projected
if the reduction in social-security-contribution exemptions affects employment growth
more than expected.
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