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Tuesday, March 18, 2003

Italy Losing Its Shine

Those who follow my arguments here at Bonobo Land will know that I see Italy's future as something of a test. If I am right in my demographic hypothesis then it is reasonable to assume that the next economy to find itslf really mired in deflation should be not Germany, but Italy (closely followed by Spain). I was getting worried since Germany seems clearly to be winning the deflation race at the moment, but the most recent results in from Italy tend to cast a rather long, dark shadow over things. Growth in 2002 was only 0.4%. Inflation, in this normally inflationary country, has all but disappeared, and the public debt has passed through the 100% of GDP mark. Note also that the even the European Commission is publically challenging some of the 'official' story. Unfortunately we don't have an economic statistics reliability index.

Economic growth in Italy this year is likely to fall well short of the government's official target of 2.3 per cent, even if the world economy is not disrupted by a long war in Iraq, Italy's central bank said on Monday.In its regular six-monthly economic report, the Bank of Italy said gross domestic product growth was unlikely to exceed 1.3 per cent and could be lower if a war lasted for a long time. GDP growth in 2002 was 0.4 per cent, its lowest level since 1993. Private sector economists described the Bank of Italy's assessment as broadly in line with their own, but noted that some forecasters are predicting GDP growth of less than 1 per cent this year. Economists at Barclays Capital in London expect growth of only 0.6 per cent.

Italy's centre-right government has been criticised by the European Commission for publishing macroeconomic forecasts that in the Commission's view are based on over-optimistic assumptions about GDP growth.In an updated stability programme sent to the Commission last year, the government forecast growth of 2.3 per cent this year, 2.9 per cent in 2004 and 3.0 per cent in both 2005 and 2006. Using these estimates, the government says Italy's budget deficit will fall from 2.3 per cent of GDP last year to 1.5 per cent this year, 0.6 per cent in 2004 and 0.2 per cent in 2005. The government is predicting a budget surplus of 0.1 per cent in 2006. The government is also forecasting a fall in Italy's public debt from 106.7 per cent of GDP last year to 96.4 per cent in 2006.

However, the Commission said recently that the government's projections "do not appear to be in line with the degree of caution that should underpin a prudent fiscal strategy".Some private sector economists say Italy's budget deficit, far from going down this year, is at risk of exceeding the limit of 3 per cent of GDP set out under the European Union's stability and growth pact.They say Italy's public finances remain a cause for concern because the government's 2003 budget relies on one-off savings and revenue-raising measures rather than long-term structural reforms to keep down the deficit and public debt.
Source: Financial Times

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