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Italy Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 49 pages

Core Views

European Central Bank monetary stimulus, an easing fiscal drag, cheaper oil prices and a weaker euro helped boost the economy in 2015, with real GDP expanding 0.8%, the fastest since 2010. However, weaker external demand, rising political risks, and a crippled banking sector will stifle Italy’s nascent economic recovery in 2016 and 2017. Subdued growth will impede fiscal consolidation efforts, leaving the economy highly vulnerable to confidence shocks and dependent on the implicit backstop of the European Central Bank to keep sovereign spreads contained. We view positively the urgent structural reform agenda of Prime Minister Matteo Renzi, and note promising progress has been made so far. The most prominent risks to the reform agenda stem from falling popular support for the ruling Democratic Party, rising support for the eurosceptic and anti-establishment 5-Star Movement, and the potential for additional bank failures to hit depositors and spur a government crisis. Italy’s upcoming constitutional referendum poses the most salient short-term political risk, given its potential to topple the reformist government of Prime Minister Matteo Renzi. However, no matter the outcome, medium-term risks remain elevated due to a stagnant economy and the continued rise in popularity of the anti-establishment and eurosceptic 5-Star Movement, which could conceivably achieve a one-party government in 2018. A failure to follow through on the structural reform agenda will imperil Italy’s long-term growth trajectory and raises the risks that the public sector debt burden will become unsustainable. Even if reforms aimed at addressing Italy’s decline in productivity growth and external competitiveness are passed, an ageing demographic profile will make debt consolidation efforts over the long term exceedingly difficult.Major Forecast Changes We have revised down our real GDP growth forecasts to 0.6% and 0.7% in 2016 and 2017 respectively, from 1.0% and 1.2% previously. We have revised down our budget deficit forecasts to 2.6% and 2.9% of GDP in 2016 and 2017 respectively, from 2.5% and 2.3% previously.

Table Of Contents

Italy Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Headwinds Stifling Nascent Recovery..........................................................................................................................................8
Weaker external demand, rising political risks and a crippled banking sector will stifle Italy's nascent economic recovery. Subdued
growth will impede fiscal consolidation efforts, leaving the economy highly vulnerable to confidence shocks and dependent on the
implicit backstop of the European Central Bank.
GDP By Expenditure Outlook.................................................................................................................................. 10
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................10
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................11
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................11
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................11
Fiscal Policy And Public Debt Outlook.................................................................................................................. 12
Debt Reduction To Take A Backseat As Political Risks Rise...................................................................................................12
The Italian government will take advantage of greater flexibility from the European Commission to pursue looser fiscal policy in the
coming years as the European Central Bank's implicit backstop keeps sovereign risk contained. Record low borrowing costs, a rapidly
falling interest burden and a primary surplus will enable modest declines in the public debt ratio, although faster progress will be
impeded by a weak growth and inflation outlook.
Structural Fiscal Position ....................................................................................................................................... 13
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES, 2015...................................................................................................................13
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................14
External Trade And Investment Outlook ............................................................................................................... 15
Sub-Optimal Rebalancing Continues..........................................................................................................................................15
We have revised up our forecasts for Italy's current account surplus in the coming years, although this primarily reflects a weaker
domestic growth outlook and a large one-off income account credit in June 2016.
Outlook On External Position.................................................................................................................................. 16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE......................................................................................................................................... 16
TABLE: TOP 5 GOODS EXPORTS IN 2015........................................................................................................................................................... 16
TABLE: TOP 5 GOODS IMPORTS IN 2015............................................................................................................................................................17
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................17
Currency Forecast.................................................................................................................................................... 18
EUR: Heading To Parity As Fiscal Woes Take Their Toll..........................................................................................................18
We have revised down our forecast for the euro, now seeing the currency weakening gradually over the coming years. The euro is caught
between the risk of rising inflation expectations on the one hand and a rising risk premium over the future of the eurozone on the other.
TABLE: BMI EUROZONE CURRENCY FORECASTS............................................................................................................................................19
TABLE: DOWNWARD REVISIONS.........................................................................................................................................................................19
Monetary Policy........................................................................................................................................................ 20
ECB Policy: Looser For Longer...................................................................................................................................................20
The economic slowdown caused in part by the UK's vote to leave the European Union in June has increased the chances that monetary
policy tightening in the eurozone will be pushed back even further. But even more importantly, the potential for systemic crises and
the long-term debt outlook increasingly suggest that the path of least resistance for the ECB will be to keep short-term rates as low as
possible for as long as possible, while extending quantitative easing.
TABLE: ECB REFINANCING RATE FORECASTS (%)........................................................................................................................................... 21
Chapter 2: 10-Year Forecast................................................................................................................... 25
The Italian Economy To 2025.................................................................................................................................. 25
Major Macroeconomic Challenges Ahead..................................................................................................................................25
We believe that the Italian economy will continue to face a very modest rate of growth over the longer term, weighed down by lower
credit availability, a weaker external environment and waning global competitiveness. We also warn that major challenges, such as the
government debt load, a deteriorating demographic profile, structural decline in productivity and potential political instability, pose threats
to longer-term economic prosperity.
TABLE: LONG-TERM MACROECONOMIC FORECASTS..................................................................................................................................... 25
Chapter 3: Political Outlook................................................................................................................... 27
SWOT Analysis......................................................................................................................................................... 27
BMI Political Risk Index........................................................................................................................................... 27
Domestic Politics..................................................................................................................................................... 28
Politics Risk To Remain Elevated Beyond Referendum............................................................................................................28
Italy's upcoming constitutional referendum poses the most salient short-term political risk, given its potential to topple the reformist
government of Prime Minister Matteo Renzi. However, no matter the outcome, medium-term risks remain elevated due to a stagnant
economy and the continued rise in popularity of the anti-establishment and eurosceptic 5-Star Movement, which could conceivably
achieve a one-party government in 2018.
TABLE: POLITICAL OVERVIEW............................................................................................................................................................................. 28
Long-Term Political Outlook................................................................................................................................... 30
Fiscal Rebalancing To Weigh On Social Cohesion....................................................................................................................30
Regardless of subsequent government's ideological leanings, Italian policymakers will be constrained by Italy's massive public debt load
and will be forced to enact unpopular measures over the next decade. This will limit the government's ability to tackle poverty and social
discontent, with the north-south socio-economic divide widening. We also expect Italy's regional and global standing to decline, and
finally, we see populist and xenophobic parties gaining momentum over the coming years.
Chapter 4: Operational Risk................................................................................................................... 33
SWOT Analysis......................................................................................................................................................... 33
Operational Risk Index............................................................................................................................................ 33
Operational Risk....................................................................................................................................................... 34
TABLE: DEVELOPED STATES - LABOUR MARKET RISK...................................................................................................................................34
TABLE: DEVELOPED STATES - LOGISTICS RISK.............................................................................................................................................. 38
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK..........................................................................................................................41
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK.....................................................................................................................43
Chapter 5: BMI Global Macro Outlook................................................................................................... 45
Global Macro Outlook.............................................................................................................................................. 45
EMs Past The Worst, But Structural Problems Persist.............................................................................................................45
TABLE: GLOBAL ASSUMPTIONS.......................................................................................................................................................................... 45
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %.................................................................................................................................. 46
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %.................................................................................................................................47
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................49

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