Italy: Italy Economy Profile

• The Italian economy will return to increase in 2015 for the initial time in three years, to ¾%
• Increase will accelerate further in 2016 to 1¼%
• Domestic request is again making a positive contribution to economic growth
• Unemployment remains high and stands in the way of a additional powerful recovery

Economy returns to growth

Italy appears to have finally emerged from the longest recession in the country's history. The economy grew 0.4% compared to the previous year in the initial half of 2015. While this is not from presently on really convincing, we do expect the economic recovery to continue. For this year, we expect the economy to grow by ¾% – the initial increase since 2011 – and we expect a slight acceleration to 1¼% in 2016 (table 1).

Table 1: Estimate table Italy

Both domestic and foreign request will increase this year and next. The recovery is supported mainly by lower commodity prices, the weak euro and accelerating increase in the country’s major trading partners. Increase will be slowed by high unemployment, high government deficit, strict credit conditions, the very scarce availability of credit and a relatively weak competitiveness.
Consumption is an significant driver…

Unlike last year, domestic request will be an significant contributor to increase this year and next. It is mainly private consumption that is driving increase, although the recovery is still weak.

Low inflation is boosting household purchasing power

Higher household purchasing power is the initial factor underpinning the increase in consumption. Nominal wages have risen faster than prices this year owing low inflation (0.4% in August; figure 1), even though wage increase is very low (1.2% in July; figure 1). The low inflation is mostly results from low commodity prices. The prices of a lot of other products have as well risen very little as retailers try to attract customers with large discounts. Since households are benefiting from lower prices at the pump and lower energy bills, they have additional money available for other products. The large discounts on offer may as well tempt consumers to purchase luxury items.

Tax cuts

An extra factor boosting private consumption is the reduction of household tax bills next year. The government has announced that it will lower gain tax in 2016 and that it will scrap the property tax on initial homes. The extent to which these measures will affect economic increase depends to a great extent on the result they have on sentiment. The scale of the cuts will be limited, as the government’s high deficit level gives little room in the budget for largesse. There is as well a strong luck that the government will have to introduce other austerity measures to pay for the tax cuts.

Figure 1: Wages still rising in real terms

Figure 2: Recovery in the labour market has a long way to go

… But the recovery in consumption is far from strong

Although higher consumption is making an significant contribution to the economic recovery, there will be no strong increase in consumption either this year or next. This is mainly because the labour market is still in the doldrums, the boost coming from lower commodity prices will be less next year and consumers are cautious.

While unemployment has recently fallen to a two-year low (12% in July), it is still high in historical perspective (figure 2). We expect unemployment to decline slightly this year and next as job opportunities will increase somewhat additional than the labour supply. However, in our opinion the increase in employment will not be enough to generate strong wage increase. Combined with rising inflation, this probably means that wage increase will weaken next year in real terms.

While very high consumer confidence boosts higher consumption, surveys are indicating that consumers still prefer not to make any large-scale acquisitions at this time. There are still doubts lurking in the background as to whether the economic tide has really turned. We therefore expect households to save a significant part of their additional real disposable gain, certainly this year. We do however as well expect that the positive development of sentiment will continue, and that this will probably lead to lower propensity to save and higher consumption next year. Even to the extent of dipping into savings.

Based on the above factors, we foresee subdued private consumption increase this year and next.