Italy Business Projection Industry Update Quarter 2 2012

Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Election Update: Three Scenarios, Little Hope Of Reform 8
We see three realistic scenarios for Italy's political trajectory over the next few months, only one of which is likely to offer any support to
investor confidence However, even in a best case scenario we see little hope of significant economic reform, with a full-blown rejection
of austerity plans and withdrawal of implicit ECB support the worst case scenario
TABLE: POLITICAL OVERVIEW 8
Long-Term Political Outlook 9
Fiscal Rebalancing To Weigh On Social Cohesion 9
Regardless of the next government's ideological leanings, we believe Italian policymakers will be forced to push through painful austerity
measures at some point over the next decade We expect this consolidation to increase poverty and social discontent within Italy, 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 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Political Deadlock To Hurt Growth 14
We are downgrading Italy's 2013 real GDP growth forecast to a below consensus -1 3%, from -0 8% previously, as political uncertainty
following the February 2013 general election weighs heavily on the consumption and investment outlook The political deadlock also
limits the potential for further structural reforms, implying no significant improvement to productivity levels over the next few years
TABLE: ECONOMIC ACTIVITY 14
Balance of Payments 16
Current Account Surpluses Here To Stay 16
Italy's current account has returned to surplus on the back of weak domestic demand and solid goods and services exports While
positive for Italy's rebalancing story, the relatively weak investment outlook means that even with current account surpluses Italy is not
immune to balance of payments risks
TABLE: BALANCE OF PAYMENTS (EURO) 16
Regional Exchange Rate Policy 18
ECB Inadvertently Propagating US$/EUR Rally 18
The strengthening euro is proving an unwelcome development for the European Central Bank (ECB), not least because it is
inadvertently propagating the rally Passive tightening of policy as long-term refinancing operations and the Securities Market Program
roll off the central bank balance sheet, coupled with strict conditions on the new outright monetary transactions - which prevent ECB
bond buying until a member state has signed up to a bailout - have effectively tied the ECB's hands With the US Federal Reserve, the
Bank of England and the Bank of Japan keeping the monetary spigots open, the euro is set to grind higher
Fiscal Outlook 20
Debt Sustainability In Doubt 20
Limited potential for further fiscal reform following Italy's February 2013 election result imply future governments will struggle to service
public sector debt without external support We have revised up our nominal deficit and public sector debt projections to reflect the
weaker fiscal outlook, and we warn that this could be revised up further if policy paralysis persists or a more populist government takes
power
TABLE: FISCAL POLICY 20
Chapter 3: 10-Year Forecast 23
10-Year Forecasts 23
Major Macroeconomic Challenges Ahead 23
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 and a weaker external environment 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
ITALY LONG-TERM MACROECONOMIC FORECASTS 23
Chapter 4: Business Environment 25
SWOT Analysis 25
BMI Business Environment Risk Ratings 25
Business Environment Outlook 26
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 26
Infrastructure 27
TABLE: BMI LEGAL FRAMEWORK RATING 27
TABLE: LABOUR FORCE QUALITY 28
TABLE: G20 - ANNUAL FDI INFLOWS 29
Operational Risk 30
Chapter 5: Key Sectors 31
Autos 31
TABLE: AUTO SALES - HISTORICAL DATA AND FORECASTS, 2010-2017 31
TABLE: AUTO PRODUCTION - HISTORICAL DATA AND FORECASTS, 2010-2017 32
Food & Drink 33
TABLE: FOOD CONSUMPTION INDICATORS - HISTORICAL DATA & FORECASTS, 2010-2017 34
TABLE: SOFT DRINK VALUE/VOLUME SALES - HISTORICAL DATA & FORECASTS, 2010-2017 35
TABLE: MASS GROCERY RETAIL SALES BY FORMAT, 2010-2017 36
Other Key Sectors 38
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS 38
TABLE: PHARMA SECTOR KEY INDICATORS 38
TABLE: TELECOMS SECTOR KEY INDICATORS 39
TABLE: FREIGHT KEY INDICATORS 39
Chapter 6: BMI Global Assumptions 41
Global Outlook 41
Past The Major Obstacles To Recovery 41
TABLE: GLOBAL ASSUMPTIONS 41
TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS 42
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS (%) 42
TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS 43

Accounting and Corporate Finance in Italy