Perspectives

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11  
EcoPerspectives // 4 quarter 2018  
economic-research.bnpparibas.com  
Italy  
Slowing growth weighs on budget debate  
Economic activity has further decelerated. In Q2 2018 GDP slowed to 1.2% y/y. Also, the full recovery of the housing market is further  
delayed, as real estate prices decreased by 0.2% y/y in Q2. According to the draft budget, the deficit-to-GDP ratio is expected to stay  
at 2.4% in 2019 and then decline below 2% in 2021. In the government scenario, GDP would increase by around 1.5% in the coming  
three years, allowing the debt-to-GDP ratio to diminish to 126.7% in 2021.  
Coalition agrees on budget targets  
1- Growth and inflation  
GDP Growth (%)  
Inflation (%)  
According to the government’s draft budget, the deficit-to-GDP ratio  
is expected to stay at 2.4% in 2019 and then slightly decline to  
below 2% in 2021, while the structural balance would remain  
unchanged at -1.7%. In the government scenario, GDP is assumed  
to accelerate to around 1.5% in the next three years, allowing the  
debt-to-GDP ratio to decline to 126.7% in 2021 from 131.2% in 2017.  
Forecast  
Forecast  
1.9  
1
.6  
1
.5  
1
.3  
1.2  
1.0  
1.0  
0
.8  
Details on every single measure on public expenditure, as well as on  
revenues, will be announced in the coming months. The final budget  
will have to be approved by parliament before the end of the year.  
0.1  
-
0.1  
1
5
16  
17  
18  
19  
15  
16  
17  
18  
19  
According to the coalition agreement between the Five Stars and  
the League, the 2019 budget should include the introduction of a  
guaranteed minimum income and pension, the reduction of the  
retirement age and tax reductions for the self-employed. The new  
budget should also announce the removal of the safeguard clauses  
that would trigger automatic VAT hikes next year. This would result  
in a tax shortfall of EUR 12 bn in 2019. According to draft budget,  
public investment, which had declined from EUR 54 bn in 2009 to  
EUR 34 bn in 2017, should increase by 1% of GDP (about  
EUR 15 bn) in the period 2019-2021.  
Source: National accounts, BNP Paribas  
2- Public deficit in the government’s budget scenario  
% of GDP  
Public deficit  Structural public deficit  
3
.0%  
2.5%  
2.0%  
1.5%  
Falling manufacturing, slower recovery  
In the first half of 2018, economic activity continued to expand,  
although at a slower pace. In Q2 2018, GDP rose by 0.2% q/q, from  
1
.0%  
0.5%  
.0%  
+
1
0.3% in the previous quarter. The annual growth rate declined to  
.2% from a peak of 1.7% in Q3 2017.  
0
The slowdown of the economy reflected the worsening conditions in  
industry. In Q2, net output in the manufacturing sector increased by  
2
016  
2017  
2018  
2019  
2020  
2021  
2
.2% y/y compared with 5% in Q3 2017. In July, industrial  
Source: Italian Ministry of Economics and Finance, BNP Paribas  
production declined further by almost 2% m/m, bringing the year-on-  
year growth rate in negative territory for the first time in the last two  
years. This decline affected in particular those sectors that had  
mainly supported the economic recovery in the previous quarters:  
production of pharmaceuticals fell by 5.2% m/m and transport  
equipment by 4.3%. The recovery in the construction sector  
continued though moderately. Nevertheless, activity remained more  
than 30% below the 2008 level.  
increasing dependence on imports that weighs on manufacturing  
growth. In H1 2018, net exports deducted 0.5% from overall GDP  
growth, as imports fell by 1% while sales abroad declined by 2.5%.  
Trade balance data show that the slowdown of exports is mainly  
due to slower sales to non-EU countries. In the seven months to  
July, the value of exports to this region increased by 2.3% y/y, from  
+
8.2% in 2017. Exports to China fell by 0.2% and to Russia and  
Negative contribution from net exports  
Turkey by about 4%. By contrast, exports to the US rose by 3.6%,  
but a more uncertain scenario is expected in the coming months.  
Since the beginning of the recovery, import growth has outpaced  
that of exports. From Q1 2013 to Q2 2018, imports rose by 22% in  
real terms, 6.5 percentage points more than exports, highlighting an  
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12  
EcoPerspectives // 4 quarter 2018  
economic-research.bnpparibas.com  
Increasing investment, slowing consumption  
3- Distribution of households by tenure status  
%
of total  
In Q2, domestic demand remained the main driver of growth,  
buoyed by the rebound of investment, 2.8% q/q after -1.1% in the  
previous quarter, thus contributing 0.5 point to GDP growth.  
Although business confidence has been declining since the  
beginning of 2018, also as a consequence of the increasing  
uncertainty surrounding the external environment, the annual growth  
rate of investment rose above 6%. Capital spending continued to  
benefit from fiscal incentives, which spurred expenditure for  
machinery and equipment, mainly in the IT sector, and for transport  
equipment.  
Ownership  
Rent  
Other  
1
00%  
80%  
6
4
2
0%  
0%  
0%  
The acceleration of investment more than offset the slowdown of  
consumption In Q2, private consumption was unchanged, after a  
0
%
2
010 2011 2012 2013 2014 2015 2016 2017 2018  
0
1
.4% increase in the previous quarter, largely due to a more than  
% fall in spending on semi-durables. The sluggishness in  
Source: Istat, BNP Paribas  
consumption is due to the moderate income growth. Household  
disposable income is still 6.6% lower than in 2007 in terms of  
purchasing power. Nevertheless, consumption is only 2% lower than  
the pre-crisis level as households have been running down their  
savings. The gross savings rate declined from 12% before the crisis  
to around 8% in the last four quarters,  
number of Italian households that declare to be willing to buy a new  
house in the next 12 months assuming that they can obtain a  
mortgage. About 81% of new house purchases are financed with a  
mortgage, while the loan-to-value ratio remains stable at 75%.  
Despite the growing number of transactions, the homeownership  
rate has steadily decreased to 70.3% (it was 77.8% in 2010),  
although remaining the third highest one in the euro area (following  
Spain and Greece).  
This has been possible as household confidence has remained  
stable around the highest level since 2013, reflecting the  
improvement in labour market conditions. In August, the  
unemployment rate fell below 10%, partly due to a fall in the  
participation rate. Employment continues to grow, although the  
number of hours worked remains well below pre-crisis level.  
Paolo Ciocca  
paolo.ciocca@bnlmail.com  
House market: the recovery further delayed  
The full recovery of the house market is further delayed. Between  
April and June 2018, according to the preliminary Istat estimates,  
the prices decreased by 0.2% y/y. The reduction was entirely due to  
existing homes (-0.7%) while the new ones recorded a 1.6%  
increase. Compared to the previous three months, total house  
prices increased by 0.8%.  
Overall, the decline of house prices from 2010 (first year for which  
official data are available) amounts to 15%, almost totally due to  
existing homes, whose prices are in 2018 21.2% lower than they  
were in 2010. Newly built houses prices are just 2.1% higher than  
eight years before.  
According to the Bank of Italy, the current real estate cycle is the  
fifth one since 1970, and since that year overall prices have almost  
doubled. Over the years the length of cycles has also been  
increasing, and the annual change rates of house prices became  
gradually lower.  
Real estate transactions showed positive growth rate for the fourth  
year in a row: in Q2 2018 they increased by 5.6% y/y,  
corresponding to 153,693 units sold.  
Transactions grew in the whole country, although the most  
significant increase took place in the North-Eastern regions (+9.3%  
y/y) and in the Islands. Several analysis point out a further increase  
in the number of transactions in the short run, thanks to the growing  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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