This 2016 Article IV Consultation highlights that the Italian economy is recovering gradually from a deep and protracted recession. Buoyed by exceptionally accommodative monetary policy, favorable commodity prices, supportive fiscal policy, and improved confidence on the back of the authorities' wide-ranging reform efforts, the economy grew by 0.8 percent in 2015 and continued to expand in the first quarter of 2016. Labor market conditions have been improving gradually, and nonperforming loans appear to be stabilizing at about 18 percent of total loans. Growth is projected to remain just under 1 percent in 2016 and at about 1 percent in 2017.

Abstract

This 2016 Article IV Consultation highlights that the Italian economy is recovering gradually from a deep and protracted recession. Buoyed by exceptionally accommodative monetary policy, favorable commodity prices, supportive fiscal policy, and improved confidence on the back of the authorities' wide-ranging reform efforts, the economy grew by 0.8 percent in 2015 and continued to expand in the first quarter of 2016. Labor market conditions have been improving gradually, and nonperforming loans appear to be stabilizing at about 18 percent of total loans. Growth is projected to remain just under 1 percent in 2016 and at about 1 percent in 2017.

This supplement provides information that has become available since the issuance of the staff report on June 22, 2016. The thrust of the staff appraisal remains unchanged.

1. The staff report identified a vote by the U.K. electorate to leave the European Union (Brexit) as a downside risk for the Italian economy. This risk has now materialized. Since the U.K. referendum, equity prices have been under renewed pressure. Italy’s main stock index, the FTSE MIB, has fallen by 9 percent; bank equity prices declined by about 25 percent (and are down for the year by over 50 percent). Bank CDS spreads widened by about 23 bps to 281 bps. Although spreads over Bunds on the 10-year government bond widened by 5 bps, yields have declined to 1.23 percent. So far, no major liquidity pressures have been observed.

2. Staff is revising down slightly the growth outlook, against the backdrop of heightened uncertainty. While the recovery is expected to continue, increased financial market volatility and higher general uncertainty could weigh on investment and growth in the period ahead. Even though direct trade and financial sector exposures vis-à-vis the U.K. are relatively limited, staff’s preliminary assessment is that growth could remain just under 1 percent in 2016 and at about 1 percent in 2017, with downside risks having increased somewhat.

3. Separately, banks have had mixed success in raising capital recently. Veneto Banca was unable to attract enough investment from either new or existing shareholders in its public offering that ended on June 24, 2016. Atlante, the private sector backstop facility for ongoing banks’ capital increases, purchased about 98 percent of the €1 billion capital increase and is set to become the bank’s controlling shareholder. In contrast, Banco Popolare completed successfully a €1 billion capital increase on June 23 that was required by the SSM in advance of the planned merger with Banca Popolare di Milano.

4. In the context of final revisions to the External Stability Report, some minor changes have been made to Italy’s page. A revised page is attached.

5. These developments do not alter the thrust of the staff appraisal. The advice presented in the staff appraisal remains valid in the face of heightened downside risks. Comprehensive pro-growth reforms, including to foster competition in product and services markets, measures to accelerate bank balance sheet repair, as well as growth-friendly fiscal measures to lower debt are critical to support growth and job creation while building buffers.

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Italy: 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Italy
Author: International Monetary Fund. European Dept.