- The free-fall in economic activity has eventually come to an end. Renewed momentum in world trade should help Italy exit the recession already in 3Q and resume growing at year-end. However, the road toward a sustainable recovery remains long and bumpy.
- The employment drop continues, but labor market statistics show that job losses would have been significantly larger if it were not for temporary lay-off schemes. We forecast further employment declines until mid-2010, with high chances of a jobless recovery thereafter.
- Loans to households stay on a moderate recovery trend, while corporate lending keeps losing steam. A marked increase in corporate bad debts is making banks more cautious: this explains the record widening of the interest rate spread on new loans to private non-financial corporations.
- The inflation rate troughed in July and has now entered a moderate upward trajectory, driven by an unfavorable base effect on energy. A rise into the 1% area seems likely by year-end, and we continue to expect average CPI at 1.5% in 2010.
- In the Focus section, we analyze the recently approved draft budget, whose main features are a very small size and a neutral impact on the deficit. We note that, over the last two years, the budget law has lost much of its importance for Italy’s economic and fiscal policy.
1. Economic Activity
The summer break has brought good news for the health of the world economy, and Italy was no exception. At the global level, the improvement has occurred mainly through a stronger-than-expected re-acceleration in trade volumes – down to unprecedented low levels after the Lehman collapse – thanks to extremely expansionary fiscal and monetary policies. In the recovery process, Asia (and China in particular) has been in the driver’s seat, with the US and the eurozone managing to follow suit relatively rapidly. A steady improvement in financial markets has contributed to strengthen the positive messages coming from economic indicators.
