Italy: Risk Assessment
Country Risk Rating
Business Climate Rating
- Reform effort (labor market, banking sector, insolvencies...)
- Manufacturing industry still important
- Renewed competitiveness and stronger export sector
- Improvement in the financial position of businesses
- High-quality infrastructure
- Considerable tourism potential
- Private and public debt levels still high, very negative net external position
- Duality of the labor market, high unemployment, and high structural unemployment
- Significant proportion of small, under-productive enterprises
- Fragmented political landscape, unity of the country weakened by regions’ push for autonomy
- Regional disparities
- Low administrative efficiency
Consolidation of the Recovery in 2018
Italy’s economic recovery was confirmed in 2017, after several consecutive years of lackluster growth. Favorable financing conditions and higher foreign demand have helped revive investment, especially in the manufacturing sector. Businesses have also benefited from the incentives under the Industrial Plan 4.0 aimed at accelerating investment in industrial innovation. Business failures are also declining, except in the construction sector. Household consumption benefited from the recovery in the labor market, but was less dynamic than in 2016, hit by long-term slower growth in purchases of durables. Growth is expected to slow slightly in 2018, but the economy will continue to show momentum. The contribution of cyclical effects are, however, likely to be less positive. The stronger euro will reduce the contribution of net exports to growth. Consumption will continue to slow, because of less sustained wage and job growth. Inflation will dip as a result of the stronger euro and lower energy costs. Tax incentives provided for in the 2018 budget will, however, drive investment. Positive growth should be observed in the construction sector after several quarters of downturn, thanks to a recovery in demand for residential housing and a slight increase in public investment.
The Banking System is Getting Stronger but Risk Has Not Been Eliminated
The health of the banking system improved sharply during the course of 2017 after the state recapitalized Monte di Paschi di Sienna Bank and wound up two large Venetian banks. The restoration of confidence in the banking system should facilitate access to credit for Italian businesses, which will continue to benefit from advantageous financing terms. But the very structure of the banking system, in which the medium-sized regional banks suffer from considerable exposure to non-performing loans remains problematic, especially as the ECB is expected to tighten its guidelines for banks regarding non-performing loans and to demand a ratio of 100% coverage for bad debts.
The upturn in activity in 2017 enabled Paolo Gentiloni’s government to bring the public deficit down to 2.1% in line with the target set by the Stability Program. Civil service wage moderation (salary freeze since 2010) and cuts to health spending have, moreover, helped reduce spending despite the EUR 10-billion bill for the bank bailout. Despite encouraging growth forecasts for 2018, the government has chosen to maintain the deficit target of 1.6% in 2018, compared with 1.2% fixed under the Stability Program. It is, however, likely that growth will be slightly higher than expected. The slowdown in consumption and the postponement of the hike in VAT from 2018 to 2019 will limit revenue growth, while spending will remain unchanged. Italian public debt will remain high, but weak interest rates will be reflected in lower interest payments.
The current account surplus will be maintained in 2018 but the rise in imports generated by higher demand for foreign goods will outpace that of exports.
Parliamentary Elections in 2018
Following the resignation of Matteo Renzi, Italy’s center-left leader, the Democratic Party (PD) appointed Paolo Gentiloni to manage current business while waiting for the parliamentary elections scheduled for spring 2018. Italy has meanwhile introduced a new electoral law in preparation for the elections. Passed in October 2017, the Rosatellum Law came out of an agreement between the PD and the two main right-wing opposition parties, Matteo Salvini’s Lega Nord (Northern League) and Silvio Berlusconi’s Forza Italia. The polarization of Italian political life between the three blocs - namely the right, the left and the Five Star Movement (M5S) after the debacle of the PD during the referendum (over constitutional reform) would, under the former law, have sharpened institutional blockages. But the Rosatellum Law will give preference to a first-past-the-post method corrected by a measure of proportional representation with a minimum required threshold for entering parliament of 3% of the national vote for single parties and 10% for coalitions and will actually penalize the M5S. However, the Populist Party, founded by Beppe Grillo and led by Luigi Di Mario, is still climbing in the opinion polls, despite the setbacks experienced in some localities, and represents the second political force in Italy and is gaining ground on the socialists. The PD is in a weakened position in parliament despite good economic results. It is true that Matteo Renzi still has a hold over the Democratic Party, of which he took over the leadership in spring, winning the primaries, but defections within the center-left are multiplying. The overwhelming favorite remains Berlusconi’s Party, the Forza Italia, which is making a big comeback in Italian politics. The victory of the Italian right-wing in Sicily, with the support of the Lega Nord and the Fratelli de Italia, bolsters the former prime minister’s lead, even though he has been caught up in and under investigation for various scandals.