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Italian economy on growth trajectory but pain ahead

Still uncertainty among consumers, firms, says Prometeia

10 February, 19:14
Italian economy on growth trajectory but pain ahead (By Gordon Sorlini) (ANSA) - Rome, February 10 - While it is certainly early to speak of a full-fledged economic recovery, Italy seems to be heading out of a recessionary slump that has led to the highest level of unemployment in decades.

According to economic think tank Prometeia Associazione, the country's anemic economy should grow by 0.8% in 2014. Things should improve further in the coming years, with Prometeia forecasting 1.4% growth in 2015 and a 1.6% expansion in 2016. However, that would still leave Italy below its GDP level of 2007, before the global financial crisis struck.

"There's good news finally," Stefania Tomasini, Prometeia's head of analysis and forecasting for the Italian economy, said during a presentation in Milan. "We're in a sort of honeymoon period. Industrial production has stopped dropping since last May - excepting the month of July - and GDP is recovering and will continue to improve in 2014". Italy isn't quite out of the woods yet. Perceptions about the economy are mixed - while business confidence is improving, especially with regard to exports, consumers are still wary about the future, according to a Prometeia document distributed at the presentation. Prometeia Associazione has been publishing economic performance analyses every quarter since 1974.

In order for a sustainable recovery to take root, Tomasini said there are "important conditions" which need to be met.

First of all, banks have to start lending again to companies in need of credit. Since this may not happen any time soon, the financial industry has to develop new instruments to allow companies to finance themselves without relying on banks, Tomasini said. When the financial crisis hit, leaving banks with billions of euros in dud loans, they closed their lending taps. This has led to a situation in which many companies can't get access to credit to run their operations, invest in their development plans and pay their bills, among other complications.

Tomasini explained that companies therefore basically have two options for raising funds - sell shares or sell debt.

Both of these strategies are out of reach for all but a few of the small and medium enterprises (SMEs) that make up the vast majority of Italy's economic fabric. And even those firms that could sell shares to the public are not always inclined to do so. Another important condition is for government to pay its bills to suppliers, many in the private sector who are struggling while they wait payment for their products and services.

Tomasini said that about 80% of funds so far paid by the various public administrations to creditors have gone to pay down company debts. In other words, the money hasn't really helped boost demand, another reason why Italy's economic recovery is so anemic.

Unfortunately, a much-needed expansionary boost is unlikely to come anytime soon, Tomasini said. If anything, fiscal tightening is likely to continue - at least in real terms - for the foreseeable future as Italy struggles to meet its European obligations. Meanwhile, inflation watchers have noticed how consumer prices in Italy had decreased by 0.7% by the end of last year, despite a 1% rise in value added tax (VAT), to 22%, last October. Tomasini said this shouldn't be read - yet - as an indicator that the country is on a perilous path of deflation.

Part of consumers' less pessimistic outlook on the future is a result of decreasing prices, which - partly counterbalancing the recent VAT increase - are helping them regain a little of the purchasing power they have lost over the past few years.

The mixed economic picture will continue to weigh on a complex employment picture. Despite the forecast recovery, Prometeia believes that unemployment will be at about 2.8 million (11.2% of the work force) at end 2016, an improvement on current levels (over three million, 12.7%), but still nearly double the level in 2007.