Italy: Risk Assessment
Country Rating1
Rating: A4
Business Climate Rating1
Rating: A2
Risk Assessment2
GDP growth undermined by the apathy evidence throughout the economy
Already low in 2010, economic growth will slow even more this year. Apart from the upturn recorded in the second quarter of 2011 (up 0.3% from the previous quarter), the recovery has been waning since the 2010 second half. And performance in the 2011 second half and 2012 first half will likely bear out the lack of dynamism. The crisis appears to have durably undermined the country's economic potential. Exports and investment, crucial drivers of economic growth until now, will undergo a bout of weakness.
Despites some gains in competitiveness attributable to the slow rise of payroll costs, the economic slowdowns suffered by the main trading partners will weigh on exports. Imports will also decelerate particularly in case of a decline in the cost of imported energy. The recently negative net contribution of foreign trade to growth will become neutral. External deficits will persist.
The already limited dynamism of corporate investment will throttle down even more. Already affected by overcapacity and the fact that corporate financial health is still not back to normal, it will be undermined by the tightening of credit and the increasingly sombre outlook. Investment in housing will likely fare relatively well thanks to the limited level of household debt and the extent of the needs. But public investment spending will likely be flat due to budgetary constraints.
Household consumption will remain sluggish. Unemployment will again exceed 8% with companies focusing on restoring working time back to normal before taking on new hires. Real disposable income will not grow much amid persistent inflation, gradual ineligibility of wage-earners for the special insurance coverage set up for partial unemployment (Cassa Integrazione Guadagni), and frozen civil service wages. Income from informal jobs will not be easy to build up again.
Persistent concerns over public finances, fiscal constraints notwithstanding
Well aware of the already high level of debt (119% of GDP in 2010), the authorities pursued prudent stimulus policy: The deficit was held below 5% of GDP and is expected to ease to less than 4% in 2011 and to 3% by 2012 with a 2% primary surplus. Under pressure from the markets and the European Central Bank, however, two successive savings plans were adopted this summer with the objective of balancing the books by 2013. In addition to the freeze on civil-service wages, the plans call for a one per cent VAT hike, a withholding tax on incomes exceeding 300,000 euros, a tax increase on financial incomes, tobacco and gambling, in conjunction with a reduction in retirement pensions and a higher minimum retirement age for women. A reduction in transfer payments to regions and municipalities, savings on health spending and civil service operating budgets are also planned. The campaign against fraud will be intensified.
Despite these measures and the limited size of the deficits, the Standard & Poor's rating agency lowered Italy's sovereign rating a notch to A while maintaining its negative watchlist status. Besides the enormous debt, the agency is concerned about the Italian economy's limited long-term growth potential, which will notably slow the deleveraging process. It moreover has doubts about Italy's capacity to implement all necessary structural reforms. The political setbacks suffered by Silvio Berlusconi and his coalition in May and in summer this year with the loss of his Milan stronghold, the crushing majority of the electorate that voted no to the referendum on water, nuclear power, and the legal system, not to mention the legal difficulties besetting the prime minister and other public figures, could effectively slow the pace of reforms and give rise to early elections (otherwise scheduled in 2013).
Corporate financial health still fragile
Indices of payment incident frequency for Italy have traditionally been above average while corporate financial health, albeit improving, has in general remained fragile. After rising 25.5% in 2009 and 19.8% in 2010, bankruptcies increased another 10% in the first half this year. Renewing credit lines is both more costly and more difficult as banks strive to improve their profitability with a view to raising their capitalization rates. SMEs, already hit hard by the recession, are in the most delicate position. Some sectors have remained healthy, like food, pharmaceuticals and IT. And sectors like metallurgy, electrical equipment, machinery and textiles, appear to have weathered the serious difficulties caused by the crisis. Others, such as timber, paper, printing, rubber/plastic processing and transport equipment manufacturing, are still convalescent.
Strengths
- Low household debt
- Over half public sector debt currently held by local actors
- Banking system with little exposure to high-risk countries
- Significant tourist potential
- Economic weight of industry
- Highly profitable niches with low price sensitivity: luxury clothing, home furnishings, foodstuffs, mechanicals
Weaknesses
- Persistence of weak growth
- Low productivity
- Inadequacies in research and higher education
- Labour market rigidity ; low employment among women and young people
- Limited efficiency of public administration ; large staff levels, high public debt, tax evasion
- Weak demographics
- Development lagging in the south