x Abu Dhabi, UAEFriday 18 August 2017

Midsummer dream for Italy is to lose sick man tag

Country still has challenges from a drought that hit farming, a less favourable monetary policy and elections next year

The 17th century fountain, called "Barcaccia" (Sunken Boat) in Rome. Italy is gradually regaining economic strength. Marie-Laure Messana l AFP
The 17th century fountain, called "Barcaccia" (Sunken Boat) in Rome. Italy is gradually regaining economic strength. Marie-Laure Messana l AFP

Italy is working hard to shake off the sick man tag.

Through government tensions, bank rescues and a migrant crisis, business sentiment has improved and the economy managed to maintain consistent growth after multiple false dawns. A report on second-quarter economic expansion this week is expected to top off a streak of encouraging numbers ranging from the labor market to exports.

Yet, the country still has challenges from a drought that hit farming and - longer term - a less favourable monetary policy and elections next year that may produce a hung parliament.

GDP probably rose 0.4 per cent in the three months through June, economists forecast, matching the pace of the previous quarter. That gain would boost expectations that full-year growth could top 1 per cent for first time since 2010, helping the economy regain ground lost in the financial crisis of a decade ago.

Italy’s recovery from a record-long recession is still lagging behind growth in euro-zone peers Germany, France and Spain, while the economy faces more uncertainty in the coming months. Elections are due in the first half of next year and about the same time the European Central Bank is expected to start rolling back its stimulus, progressively reducing its purchase of Italy’s government bonds.

The finance minister Pier Carlo Padoan has downplayed the effect of less expansionary monetary conditions, telling SkyTg24 television on August 3 that the economy is strong enough to withstand higher interest rates and bond yields.

According to the UniCredit economist Loredana Federico, a 0.4 per cent quarterly growth pace would help Italy reduce its debt ratio, which at more than 130 per cent of GDP is the second highest in the euro zone. “It would certainly allow it to weather the possible difficulties of higher debt-financing costs” as quantitative easing ends, she said.

 

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Last month, the IMF said Italy could grow about 1.3 per cent this year, 1 percent in 2018 and 0.9 per cent 2019. Recent economic reports supported the view that the economy is on the mend.

A measure of private-sector activity is near the highest in a decade, and industrial production expanded a seasonally adjusted 1.1 per cent in the second quarter. Unemployment fell to 11.1 per cent in June, matching the lowest since 2012.

“Industrial output is a bellwether of broader activity and the expansion in the second quarter is consistent with economic expansion of about 0.5 per cent,” Bloomberg Intelligence economists including Maxime Sbaihi said in an August 9 note.

Exports rose in the second quarter as stronger sales of goods and services to other European Union nations offset a drop to the rest of the world. An unfavourable exchange rate, with the euro up about 12 per cent against the dollar this year, could weigh on global demand.

The summer season had opened with the prime minister Paolo Gentiloni’s government orchestrating the rescue of three lenders, including the world’s oldest, Banca Monte dei Paschi di Siena, that required months of negotiations with European Union authorities. The moves will alleviate another burden on the nation’s economy.

 

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Consumer confidence remains a dark spot in a generally improving economic picture. Household morale has been on a downward trend since November 2015, in contrast to an improvement in the manufacturing confidence index that matched the highest in almost a decade last month.

That is because, according to the IMF, average Italians still earn less than they did two decades ago. 

“Their take-home pay took a dip during the crisis and has still not yet caught up with the growth in key euro-area countries,” it said late last month. “It could take nearly a decade for wages to return to their 2007 levels.”