Country Report Italy February 2009

Summary

Despite Italy's rapidly deteriorating economy, the Economist Intelligence Unit expects Silvio Berlusconi's right-of-centre coalition to remain in government in 2009-10. He has a clear parliamentary majority and the opposition is in disarray.
The support of the Lega Nord will be crucial to the survival of Mr Berlusconi’s government. Tensions between the regionalist Lega and the rightist Alleanza Nazionale are likely to emerge over fiscal federalism and other issues.
GDP contracted by an estimated 0.6% in 2008. Our baseline forecast is that it will contract by a further 2.5% in 2009 and remain flat in 2010. However, there are still major downside risks, even to this negative outlook.
The fiscal deficit is forecast to rise from an estimated 2.9% of GDP in 2008 to 4-4.5% of GDP in 2009-10. The public debt/GDP ratio is expected to be 110-115% in 2009-10, up from about 105% 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 will manage to bring forward EU-supported spending.

Although a poll in January 2009 showed that a majority of Italians still backed Mr Berlusconi, support for the prime minister and his government fell.
Recent episodes of violent crime and clandestine immigration may have led Italians to question the effectiveness of the government's hardline policies.
A new electoral law has been approved for the European Parliament elections to be held in June. The new system is still based on pure proportional representation, but introduces a representational threshold of 4%.
Italy's large public debt has deterred the government from introducing a major fiscal stimulus package, although some measures have been adopted and others are being drawn up.
In mid-January the cabinet formalised its provisions to boost the capital base of Italian banks, should the need arise.
In November 2008 industrial output fell by 2.3% month on month, the third consecutive sharp monthly fall. On an annual basis it dropped by 9.7% year on year, the largest fall since the beginning of the series in January 1991.
The retail sales value index fell by 0.2% month on month in November 2008, following a 0.4% drop in October. Sales fell by 3% year on year.
According the Istituto di Studi e Analisi Economica (ISAE), manufacturing firms' confidence fell to an all-time low in January 2009. Consumer sentiment picked up slightly, but the index remains well below the historical average.

Source: Country Report