Country Report Italy August 2008

Outlook for 2008-09

• Silvio Berlusconi's outright victory in the April 2008 general election has given him clear majorities in both houses of parliament. The Economist Intelligence Unit expects his coalition to remain in government beyond 2009.
• The support of the Lega Nord will be crucial to the survival of Mr Berlusconis government. Tensions between the regionalist Lega and the rightist Alleanza Nazionale are likely to emerge over fiscal federalism and other issues.
• There has been a shift in emphasis on foreign policy under Mr Berlusconi. His preferred approach of bilateral relations with strategically important countries and his lack of tact will make agreeing common EU positions difficult.
• We expect the fiscal deficit to be 2% of GDP in 2008, lower than previously forecast. In 2009 it is forecast to rise to 2.6% as growth will remain weak and measures adopted to cut the deficit are likely to be difficult to implement.
• GDP growth is forecast to slow from 1.4% in 2007 to 0-0.5% in 2008-09. Inflation (EU harmonised measure) will rise from 2% in 2007 to 3.8% in 2008, then ease to 2.7% in 2009.

Monthly review

• The government's law and order decree became law on July 24th. The automatic suspension of up to 100,000 trials has been avoided. However, tensions between the government and the judiciary have remained high.
• On July 22nd parliament approved a bill giving Mr Berlusconi and three other top institutional figures immunity from prosecution.
• Italy's treatment of gypsies has drawn widespread criticism. The minister of the interior, Roberto Maroni, of the Lega Nord, has rejected allegations of discrimination and police violence.
• Based on figures for the state-sector borrowing requirement in the first half of 2008, the public finances have been in better shape than previously expected.
• Recent data have confirmed the weakness of the economy in the second quarter. According to leading indicators no major improvement should be expected in the third quarter.
• Industrial orders fell sharply in May. Business and consumer confidence indicators continued to slide in July.
• Consumer price inflation accelerated to 4.1% in July from 4% in June, according to the EU harmonised index.
• The foreign-trade deficit was 6.2bn in January-May, about 1.5bn lower than in the same period of 2007. Seasonally adjusted data showed a fall in exports and imports in May.