Country Report Italy April 2009

Outlook for 2009-10

• Italy's right-of-centre coalition government led by Silvio Berlusconi faces a major challenge to limit the impact of the global crisis on Italy's rapidly deteriorating economy and keep its fragile public finances under control.
• Government cohesion will be hindered by divisions in the ruling coalition, but the Economist Intelligence Unit expects it to remain in office. Mr Berlusconi has a comfortable parliamentary majority and the centre-left is in disarray.
• GDP contracted by 1% in 2008. Our baseline forecast is that it will contract by a further 4.5% in 2009 and by 0.5% in 2010.
• The fiscal deficit is forecast to rise from 2.7% of GDP in 2008 to 5-5.5% of GDP in 2009-10. The public debt/GDP ratio is expected to be about 118% by the end of 2010, up from 105.8% in 2008.
• Much larger deficits cannot be ruled out as our forecast assumes that the minister of the economy, Giulio Tremonti, will resist pressure for tax cuts to boost the economy and interest rates do not rise sharply.
• Inflation (EU harmonised measure) will average 0.6% in 2009 and 0.9% in 2010, well down on 3.5% in 2008, reflecting weak demand and lower commodity prices.

Monthly review

• On March 29th Mr Berlusconi was formally chosen as the leader of the new right-of-centre party, the Popolo della Liberta (PDL, People of Freedom), which merges two major parties and a dozen smaller parties.
• An earthquake in the Abruzzo region on April 8th left 260 dead and 30,000 homeless. The state's initial response was deemed to have been good.
• There have been tensions between Mr Berlusconi and Gianfranco Fini, the speaker of the Chamber of Deputies, in recent months and the government suffered an embarrassing defeat in a vote on a law and order decree in March.
• In the first three months of 2009 the state sector borrowing requirement was 29.7bn, 9bn higher than in the first quarter of 2008.
• By the end of March most of the 10bn-12bn earmarked by Mr Tremonti to help Italian banks to boost their capital base had already been taken up.
• The fall in GDP in the fourth quarter, the largest in 28 years, was driven mostly by declines in fixed investment and exports of goods and services.
• Italian seasonally adjusted unemployment rose to 6.9% in the fourth quarter of 2008 from 6.7% in the previous three months, hitting the highest jobless rate since the second quarter of 2006.

Source: Country Report

This report covers the following industry codes:
SIC Code: 37
NAICS Code: 336