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Italy Business Forecast Report Q2 2014

  • March 2014
  • -
  • Business Monitor International
  • -
  • 42 pages

Core Views

We view positively the urgent structural reform agenda of new Prime Minister Matteo Renzi. However, we remain sceptical that he will be able to avoid the chronic instability, political infighting and rigid vested interests that that have in the past impeded reform efforts. Lack of significant structural reform in the previous years seriously jeopardises 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. Public sector debt levels imply that Italy will eventually be forced to undergo a period of fiscal consolidation over the next decade, which will likely have negative implications for the country’s social fabric, regional and global standing and governability.

Major Forecast Changes

No major forecast changes

Key Risks To Outlook

If Renzi’s reform programme succeeds at rapidly pushing through key reforms in 2014 and 2015, we see upside risks to our growth forecasts over the medium and long term. Although key structural reforms would likely take several years before their full effect on the real economy is felt, immediate positive benefits could come in the form of rising investor and business confidence, lowering credit spreads while encouraging domestic firms to expand and invest. The Italian banking sector remains a key downside risk ahead of the European Central Bank’s Asset Quality Review. Any major capital shortfalls uncovered could reignite the negative feedback loop between sovereign and banking sector risk, leading to another rapid loss of investor confidence in Italian assets. This would significant impede the government efforts to push through reform while staying within the European Union’s budget deficit limits.

Table Of Contents

Italy Business Forecast Report Q2 2014
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
Major Hurdles Ahead For Renzi 8
Prime Minister Matteo Renzi's urgent structural reform agenda could go far to address endemic political instability and boost long-term
growth potential. However, we see key impediments to his success, and for now remain doubtful that his government will be able to
produce materially different results from its predecessors.
TABLE: Political 8
Long-Term Political Outlook 9
Fiscal Rebalancing To Weigh On Social Cohesion 9
Regardless of subsequent government's ideological leanings, we believe Italian policymakers will eventually 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
Tepid Recovery Highlights Need For Reform 14
We maintain our below- consensus real GDP growth forecasts for Italy of 0.4% and 0.7% in 2014 and 2015 respectively, as domestic
demand remains severely constrained by record high unemployment, contracting corporate credit and ongoing fiscal consolidation.
Meanwhile, a lack of structural reform has prevented competitiveness gains and the potential for a more robust export led recovery.
TABLE: ECONOMIC ACTIVITY 14
Balance Of Payments 16
Rebalancing Has Nearly Run Its Course 16
Italy's rapid current account rebalancing has now largely run its course. We forecast the current account surplus to peak at 1.1% of GDP
in 2015, before narrowing gradually in the years beyond.
TABLE: BALANCE OF PAYMENTS (Euro) 16
Fiscal Policy 18
Fiscal Constraints Remain Prevalent 18
Deficit consolidation will not be a priority of Prime Minister Matteo Renzi's government, which will emphasise growth and employment
boosting measures. However, the European Union's 3.0% of GDP deficit limit will be respected, implying that fiscal constraints will
continue to impede the policy agenda. Based on our current forecasts, long-term GDP growth rates will be insufficient to achieve a
significant reduction in public debt ratios, emphasising the urgent need for structural reform.
TABLE: FISCAL POLICY 19
Regional Exchange Rate Forecast 20
EUR: Monetary Policy Decoupling Will Weaken The Euro 20
We expect euro strength against the dollar and on a trade-weighted basis to persist in H114. However, we continue to argue that the
economic and monetary policy cycles in the eurozone are lagging further behind peers in the US and UK, which will trigger a re-pricing
of the euro towards the end of 2014. Indeed, we believe that weak eurozone economic growth and lingering deflationary risks will spur
the European Central Bank into loosen monetary policy further.
TABLE: BMI Eurozone Currency Forecast 20
Chapter 3: 10-Year Forecast 23
The Italian Economy To 2023 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, 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 23
Chapter 4: Business Environment 25
SWOT Analysis 25
BMI Business Environment Risk Ratings 25
Business Environment Outlook 26
Institutions 26
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 26
TABLE: BMI LEGAL FRAMEWORK RATING 27
Infrastructure 28
TABLE: LABOUR FORCE QUALITY 28
Market Outlook 29
TABLE: G20 - ANNUAL FDI INFLOWS 29
Operational Risk 30
Chapter 5: Key Sectors 31
Autos 31
TABLE: Auto Sales - Historical Data and Forecasts 31
TABLE: Exports By Vehicle Category 32
TABLE: Auto Trade - Historical Data and Forecasts 32
TABLE: Auto Production - Historical Data and Forecasts 32
Food and Drink 36
TABLE: Food Consumption Indicators - Historical Data and Forecasts, 2010-2017 36
TABLE: Soft Drink Value /Volume Sales - Historical Data and Forecasts , 2010-2017 38
TABLE: Mass Grocery Retail Sales By Format - Historical Data and Forecasts, 2010-2017 38
Other Key Sectors 39
table : Oil and Gas Sector Key Indicators 39
table : Pharma Sector Key Indicators 39
table : Infrastructure Sector Key Indicators 39
table : Telecoms Sector Key Indicators 40
table : Defence and Securit y Sector Key Indicators 40
table : Freight Key Indicators 40
Chapter 6: BMI Global Assumptions 41
Global Outlook 41
Global Growth Optimism Turning To Disappointment 41
Table: Global Assumptions 41
Table : Developed States , Real GDP Growt H, % 42
Table : BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 42
Table : Emerging Markets , Real GDP Growth , % 43

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