A more self-sustained recovery

EcoPerspectives // 2nd quarter 2018  
A more self-sustained recovery  
The recovery has become more self-sustained, benefiting from stronger domestic demand and net exports turning positive again. In  
017, real GDP rose by 1.5%. Labour market conditions further improved, supporting household expenditure. Favourable financing  
conditions and fiscal incentives continued to bolster expenditure on capital goods and advanced digital technologies. In 2017 the  
number of housing transactions increased for the fourth year in a row, albeit at a slower rate than in the past. Several indicators  
predict a mild improvement in the real estate sector’s general conditions in the months to come.  
Strong exports  
1- Growth and inflation  
The economic recovery has become more self-sustained. In 2017,  
real GDP rose by 1.5% from 1% in 2016, a highest since 2010.  
Domestic demand added 1.5 percentage points to overall growth, as  
in the previous year, while stocks subtracted 0.2 point. Given the  
global cyclical upswing, the contribution of net exports returned to  
positive territory for the first time since 2013 (0.2 point). Despite the  
fourth consecutive year of recovery, real GDP is still 5.5% below the  
pre-crisis level.  
GDP Growth (%)  
 Inflation (%)  
1.5 1.5  
In 2017, the strengthening of economic activity was broad based.  
Manufacturing output rose by 2%, spurred by strong increases in  
transport equipment (5.3%) and pharmaceutical products (4.5%).  
Activity in the services rose by 1.5%, with that of restaurants and  
hotels increasing by 4.5%. Although accelerating, construction  
activity only recovered moderately. The sector’s value added  
remained more than 30% below the 2007 peak, despite growing by  
Sources: National accounts, BNP Paribas  
2- Real GDP and components  
Contributions to % change of GDP in percentage points  
Stocks Investment Private consumption Net exports  
Public consumption ▬ GDP  
Survey indicators and latest data suggest that the recovery  
continued in Q1 2018 at a similar pace as in Q4 2017. In the first  
two months of 2018, industrial production rose by 3.4% y/y, thanks  
to a rebound in textile, clothes and shoes (5.9%) and metal products  
9.1%). Lastly, exports rose by 9.5% y/y in January, with sales in the  
EU increasing by 13%. For 2018 as whole, real GDP is expected to  
increase by around 1.5%.  
The elections left Italy with two clear winners (Five Star Movement  
and Northern League) but no clear-cut majority. The process for  
forming a new coalition looks to be long. In the absence of a fully-  
fledged government, the European Commission may show some  
forbearance by not demanding additional reforms to arrive at a  
structural improvement of the budget deficit of 0.6 point of GDP in  
Source: Istat  
2018. The outgoing Gentiloni government pledged to reach an  
adjustment of only 0.3 point. Higher uncertainties loom for next year,  
with risks of some backtracking on pension and labour reforms.  
particular, the number of workers aged 55-64 years increased  
strongly, by almost 230 thousands. In 2017, these workers  
accounted for 18.4% of the total, about 8 percentage points more  
than the pre-crisis level. By contrast, the share of younger workers -  
between 15 and 24 - share fell to 4.5%. The expiration of tax  
incentives on new hires with open-ended contracts during the year  
resulted in a strong increase in temporary hirings. Wages were  
virtually stagnant. As consumer prices increased by 1.3%, real  
disposable income only increased by 0.6%. Households responded  
to the disappointing income developments by reducing savings in  
Moderate consumption  
In 2017, private consumption rose by 1.3%, contributing 0.8 point to  
the GDP growth. Italian households increased, in particular, their  
spending on communication (5%), hotels and restaurants (3.6%)  
and health products and services (2.8%).  
Consumption was still underpinned by further, although slowing,  
improvements labour market conditions. In 2017, employment  
increased by more than 200 thousands to over 22.4 million. In  
EcoPerspectives // 2nd quarter 2018  
order to maintain their consumption plans. The savings rate  
declined from 8.5% in 2016 to 7.8%.  
- Investment trends  
Chain linked volume index; Q1 2008=100  
Firmer investment  
 Total - - - Construction  Housing  
Economic and financial conditions for firms have improved. In 2017,  
value added of non-financial corporations rose by almost 3%,  
reaching the highest level in the last twenty years. This has  
strengthened business confidence, which has been hovering around  
at a record high level since the mid-2017.  
In 2017, total investment rose by 3.7%, accelerating from +3.2% in  
the previous year, despite a further decline of the public component  
-2.5%), supported by favourable financing conditions and tax  
incentives. Investment in machinery and equipment rose by 2% and  
those in transport equipment by 35.5%. Despite this solid pace of  
recovery, total investment is still more than 20% below the peak in  
008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
Source: BNL calculations based on Istat data  
House transactions up  
over the next two years, compared to around 7% which expects a  
Among the main euro area countries, Italy is the only one where the  
real estate prices have not yet recovered. In fact, house prices were  
on a declining trend between 2011 and 2017. According to the  
preliminary Istat estimates, the prices of residential properties  
recorded a year-on-year decrease of -0.3% between September  
and December 2017, despite slightly rising with respect to the  
previous three months (0.1%). In 2017 as a whole, the decline was  
Until now the construction sector has benefited only to a limited  
extent from the tentative recovery in the real estate sector.  
According to Istat data for Q4 2017, investments in construction  
were 35.5% lower than in Q1 2008 in real terms, while those in the  
residential segment alone were 30.4% lower. Furthermore, between  
September and December 2017, construction investment rose by  
0.4%, as prices of existing houses fell by 0.6%, while those of the  
.4% from a year earlier, of which housing by 2.8%, compared to an  
new ones slightly recovered (+0.1%). All in all, the fall of house  
prices since the 2011 peak amounts to 16%, almost totally due to  
existing homes.  
increase in overall investments by 4.4%. Also, the construction  
sector’s value added at the end of 2017 was 32 percentage points  
lower than in the first quarter of 2008 in real terms.  
Nevertheless, real estate transactions remain on a rising trend. In  
The prolonged period of crisis experienced by the country since  
2017 house transactions increased for the fourth year in a row,  
008 has led to remarkable increase in firms exiting the construction  
although at a slower rate than in the past (4.8% compared to 16.3%  
in 2016 and 6.6% in 2015). In Q4 2017, house transactions  
increased by 6.3% y/y after having recorded 1.4% y/y in the  
previous quarter. Accordingly, the number of transactions in 2017  
amounted to 542,480, approximately the same level as in 1997 and  
about 335,000 units less than the peak reached in 2006 (877,000).  
Transactions grew in all parts of the country, although most in the  
Southern regions (9.3% y/y in Q4 2017), followed by those in the  
North Eastern (7.4% y/y). Quite weak was the trend growth of sales  
in the Central regions (3%) mainly due to the bad performance of  
the main cities in the area (0.3% y/y). The growth in other parts was  
close to the national average.  
sector. According to Istat between 2008 and 2015, 123,583  
enterprises (or 20% of the number of construction firms in 2008) left  
the market. The crisis hit particularly small enterprises (-45.5%) and  
medium ones (-35%).  
Paolo Ciocca  
Several indicators predict a mild improvement of the real estate  
market in the coming months. According to Nomisma, a leading  
research company in the field, the average number of months  
needed to sell a house, after reaching a peak of 10 in 2014, has  
been slowly decreasing and stands now at about 7. In the same  
period, the time span necessary to lease a house dropped from 3.9  
to 2.8 months, while the average discount applied on the asking  
price has steadily declined, and is now 15% on average. Moreover,  
about half of a sample of real estate agents interviewed by the Bank  
of Italy expects a general improvement in the business conditions  
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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