Country Report Italy December 2008

Outlook for 2009-10

• 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 over 2009-10.
• 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.
• We expect the fiscal deficit to rise from 2.6% of GDP in 2008 to just over the 3% ceiling for euro area countries in 2009 and 2010, as growth will remain weak and measures to cut the deficit will be difficult to implement.
• This budget forecast assumes that the minister of finance, Giulio Tremonti, will resist pressure for tax cuts to boost the economy, although he will try to bring forward EU-supported expenditure.
• The Italian economy is likely to have contracted in 2008 and to contract further in 2009, with both exports and domestic demand weakening. Only a modest recovery is forecast in 2010 and this is subject to risk.
• Inflation began to fall in September-November and should average only 1.5% in 2009 and 2010 compared with an estimated 3.6% in 2008.

Monthly review

• The popularity of Mr Berlusconi and his government has remained high, although it is slipping slightly.
• The main governing party, the Popolo della Liberta, is in the process of completing a merger between the former Forza Italia and Alleanza Nazionale, and remains well ahead of the main opposition party.
• Italy is preparing for its chairmanship of the G8 group of industrialised countries, which it intends to expand to include the leaders of other major economies, like China, India and Brazil.
• The finance minister, Mr Tremonti, is realistic in accepting that the state of the public finances allow for only a small fiscal boost, but he is trying to channel this to maximise its impact. EU funds are to be drawn down more rapidly.
• Discussions are ongoing on the provision of state capital to the main banks, which are in less trouble than those in most other major EU countries.
• GDP has fallen for two quarters in a row and industrial production has fallen to well below year-earlier levels. Car sales have fallen by 12 % in the first nine months and the volume of retail sales by 3%.

This report covers the following industry codes:
SIC Code: 60;1;10
NAICS Code: 52;11;212