Fast Market Research recommends "Italy Business Forecast Report Q4 2013" from Business Monitor International, now available
Boston, MA -- (SBWIRE) -- 10/29/2013 -- Following the February 2013 general election which resulted in a clear voter rejection of austerity, the coalition has adopted a more pro-growth stance, implying an end to further fiscal consolidation. Although this will support short-term GDP growth, it also means the pace of structural reform implemented under former Prime Minister Mario Monti will slow dramatically, and in some cases reverse.
Lack of significant reform anytime soon seriously jeopardises Italy's long-term growth trajectory, and raises the risks that the public sector debt burden will become unsustainable.
However, the very high public sector debt levels imply that Italy will eventually be forced to undergo a period of fiscal consolidation over the next decade, which will likely have negative implications for the country's social fabric, regional and global standing and governability.
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Major Forecast Changes
Given the change in rhetoric and direction of the new government, who have already suspended an unpopular housing tax, we do not expect further fiscal consolidation in 2013. As such, we have revised our nominal budget deficit forecast from -2.9% of GDP to -3.2% of GDP. Although political uncertainty makes policy trajectory difficult to forecast, we have revised down our expectations in 2014 as well, from -2.9% to -3.1% of GDP.
We now forecast the Italian economy to contract by 1.5% in 2013, from our previous -1.3% forecast. The recovery in 2013 remains sluggish, with consumption, investment and exports all remaining broadly weakened through H113. While we revised up our 2014 growth forecast modestly to 0.3% from 0.1%, this reflects primarily a higher contribution of net exports resulting from a downward revision to our expectations for import growth.
Key Risks To Outlook
Given a fragile and contentious government coalition, the main risk to our forecast stems from the potential for renewed government instability. Furthermore, there is the potential for the government to overreach in its attempts to stimulate economic growth, creating a visible deterioration of fiscal accounts. Both of these scenarios would potentially create a crisis of investor confidence that would necessitate decisive fiscal consolidation to protect debt sustainability. This would severely damage the outlook for investment and consumption, necessitating a downward revision of our growth forecast.
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