income in the wake of the recession and restrained fiscal policy in view of the high level of public debt.
But there is a long way to go Despite the recovery, GDP in mid-2010 remained more than 5% below its peak at the beginning of 2008. This is a larger fall than in the majority of OECD and EU countries, and the recovery so far appears to confirm the weak trend of growth of the last decade. While there has been a strong upturn in investment, it remains well below its long-run average share of GDP, as in other countries, cutting prospects for future growth.
1 2 http://dx.doi.org/10.1787/888932347123
Italy: Employment, income and inflation Percentage changes
2008 2009 2010 2011 2012
Employment1 0.3 -1.7 -0.4 0.5 0.8
Unemployment rate1,2 6.7 7.8 8.6 8.5 8.3
Compensation of employees 3.7 -0.6 0.6 2.7 2.1
Unit labour cost 5.1 4.7 -0.4 1.3 0.5
Household disposable income 2.2 -3.0 -0.1 2.8 2.6
GDP deflator 2.8 2.1 0.7 1.2 1.1
Harmonised index of consumer prices 3.5 0.8 1.5 1.4 1.4 Core harmonised index of consumer prices3 2.2 1.6 1.5 1.3 1.4 Private consumption deflator 3.2 -0.1 1.6 1.5 1.4 1.
2. As a percentage of labour force.
3. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.
Source: OECD Economic Outlook 88 database.
Data for whole economy employment are from the national accounts. These data include an estimate made by Istat for employment in the underground economy. Total employment according to the national accounts is approximately 2 million, about 10%, higher than employment according to the labour force survey. The unemployment rate is calculated relative to labour force survey data.
Italy
1. Gross fixed capital formation.
Source: OECD Economic Outlook 88 database.
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2007 2008 2009
18.0 18.5 19.0 19.5 20.0 20.5 21.0 21.5
%
2010 Investment¹ is low
As a percentage of GDP
2000 2002 2004 2006 2008 2010250
300 350 400 450 Billion
Exports of goods and services,volume Imports of goods and services,volume
Trade is recovering Billion euros, 2000 prices
Unemployment may soon peak, but self-employment income is very weak
The Cassa Integrazione wage support scheme has expanded considerably, providing earnings support to up to 350 000 effectively laid-off, but still formally employed, workers at its peak in 2009 (down to around 250 000 in mid-2010). The support is paid by the government through employers, causing data to show falls in per capita wages even as hourly earnings were affected only very modestly by the recession. This p r o t e c t i o n o f e m p l oy m e n t h a s m u t e d t h e i n c r e a s e i n o p e n unemployment, which has probably neared its peak – though it is difficult 1 2 http://dx.doi.org/10.1787/888932347142
Italy: Financial indicators
2008 2009 2010 2011 2012
Household saving ratio1 8.2 7.1 5.1 5.8 5.9
General government financial balance2 -2.7 -5.2 -5.0 -3.9 -3.1
Current account balance2 -3.6 -3.2 -3.3 -2.8 -2.3
Short-term interest rate3 4.6 1.2 0.8 1.1 1.8
Long-term interest rate4 4.7 4.3 3.8 3.7 4.5
1. Net saving as a percentage of net disposable income. Includes “famiglie produttrici”.
2. As a percentage of GDP.
3. 3-month interbank rate.
4. 10-year government bonds.
Source: OECD Economic Outlook 88 database.
1 2 http://dx.doi.org/10.1787/888932347161
Italy: Demand and output
Fourth quarter 2010 2011 2012
Current prices
€ billion
Percentage changes from previous year, volume (2000 prices)
Private consumption 911.6 0.4 0.6 1.0 0.2 0.8 1.1 Government consumption 327.8 -0.3 0.1 0.0 -0.1 0.0 0.1 Gross fixed investment 287.3 2.0 1.5 3.1 2.5 2.3 3.4 Machinery and equipment 131.7 8.0 3.3 4.4 7.9 3.5 4.9 Construction 155.7 -3.1 -0.3 1.8 -2.2 1.1 1.9 Residential 71.7 -3.4 0.5 1.8 -0.4 1.1 1.9 Non-residential 84.0 -2.9 -0.9 1.8 -3.7 1.1 1.9 Final domestic demand 1 526.8 0.5 0.7 1.2 0.6 0.9 1.3 Stockbuilding1 - 0.4 0.2 -0.1 0.0
Total domestic demand 1 526.4 0.7 0.6 1.2 0.3 0.9 1.3 Exports of goods and services 363.9 7.9 6.7 5.3 10.2 5.7 5.3 Imports of goods and services 369.9 6.6 3.7 3.9 5.7 3.6 4.1
Net exports1 - 6.0 0.3 0.8 0.4
GDP at market prices 1 520.3 1.0 1.3 1.6 1.3 1.5 1.7 Note: National accounts are based on official chain-linked data. This introduces a discrepancy in the identity between real demand components and GDP. For further details see OECD Economic Outlook Sources and Methods (http://www.oecd.org/eco/sources-and-methods).
Detailed quarterly projections are reported for the major seven countries, the euro area and the total OECD in the Statistical Annex.
1. Contributions to changes in real GDP (percentage of real GDP in previous year), actual amount in the first column.
Source: OECD Economic Outlook 88 database.
2009 2010 2011 2012
to predict what will happen as workers begin to emerge from the maximum two-year eligibility for the short-time working schemes.
Overall, household income was more strongly affected by non-wage income than earnings from employment: net income from self-employment and property fell over 10% in 2009 and saving fell despite reduced consumption.
Inflation has picked up Consumer price inflation has picked up in recent months reaching 1.8% year-on-year in the third quarter, up from 1.3% in January. This is partly the result of higher energy prices.
Budgetary discipline has been rewarded and...
Italian government debt has performed relatively well on the bond markets compared with that of other southern European countries. The government is concerned to maintain this performance and to start the process of getting the very high level of public debt on a downward path.
It further tightened fiscal policy in the budget legislation for 2011-13 and aims at reducing the general government deficit to 2.7% of GDP in 2012 and 2.2% in 2013.
... the announced further tightening is feasible but challenging
The OECD projections assume that measures to achieve these objectives will be fully implemented in the remaining two years of the 2011-13 budget period. The measures include a three-year freeze on pay in the public sector and significant cuts in finance for sub-national government expenditure. It is also assumed that measures to reduce tax evasion will improve revenues by about 0.4% of GDP. Such measures are necessary, but will require consistent application to ensure continuing increases in the tax take above the modest increases in income that can be expected. Despite the difficult situation, the government has appropriately refrained from significant further “one-off” measures. The OECD projection for borrowing in 2012 is slightly above official projections which are based on stronger output growth; the ratio of debt to GDP should peak in 2012 at around 120%.
The shape of the projected recovery reflects confidence indicators
September surveys indicated that consumer confidence has not yet recovered from its decline earlier in 2010, whereas the confidence climate among manufacturing and extractive firms has continuously improved over the past 18 months. Reflecting this, the continuation of the modest recovery in demand is concentrated on investment and exports rather than household spending. Private consumption will nevertheless grow somewhat as incomes recover and employment stabilises and begins to grow again. Public consumption growth will be limited by fiscal restraint.
Construction investment, both housing and non-housing, may not pick up until 2012.
Growth in trade will continue
Exports will continue to respond to growth in world demand, though the labour market shows no sign of helping to reverse the decline in Italy’s competitiveness position; to achieve this, more will need to be done in structural policy to improve the ability of the economy to respond to
demand. Further losses of market share can therefore be expected, but exports will nevertheless grow significantly more than imports over the next couple of years.
A segmented labour market contributes to above-average inflation
National wage agreements reached during this year seem to have been largely insensitive to the weakness of the economy. This is projected to continue, resulting in some acceleration in per capita earnings in 2010-11 as hours worked recover somewhat. On the other hand, flexibility in the large informal sector is no doubt reflected in the falls in self-employment income in 2009. Despite the large output gap, consumer price inflation is therefore also projected to be persistent, stabilising under 2% but likely slightly above the level in other large euro area members.
A key uncertainty is over investment
While external risk is always present, the main domestic risk to the growth projections is on business investment. If the surge in the first half of 2010 is due more to government incentives than improved prospects and financial conditions then it may fade, but there is also a possibility that it could grow considerably faster if businesses are willing and able to finance more normal levels of investment.