Country Report Italy July 2009

Outlook for 2009-10

• Despite the severe economic slowdown and embarrassing allegations about Silvio Berlusconi's private life, the Economist Intelligence Unit expects his right-of-centre government to remain in office beyond the forecast period.
• Government cohesion and effectiveness will be hindered by divisions in the ruling coalition, but Mr Berlusconi has a comfortable parliamentary majority and the centre-left opposition is in disarray.
• Italy's poor international standing is unlikely to improve under the current government given the level of international media attention surrounding allegations about Mr Berlusconi's personal life.
• GDP contracted by 1% in 2008. Our baseline forecast is that it will contract by a further 4.8% in 2009 and by 0.2% in 2010.
• Despite the limited cost of stimulus measures announced by the government, the fiscal deficit is forecast to rise to 5-5.5% of GDP in 2009-10. The public debt/GDP ratio is expected to be about 120% by the end of 2010.
• Inflation (EU harmonised measure) will average 0.7% in 2009 and 1% in 2010, reflecting weak demand and lower commodity prices. The 2009 forecast is well down on 3.5% in 2008, but still above the euro area average.

Monthly review

• New allegations about the prime minister's private life have caused him considerable embarrassment, just as Italy prepares to host the G8 summit.
• Mr Berlusconi's approval ratings slipped in an opinion poll in late June, but only slightly. His right-of-centre coalition inflicted another series of local electoral defeats on the divided centre-left opposition on June 21st-22nd.
• In June divisions in the centre-left Partito Democratico re-emerged with force when Dario Franceschini, the interim leader, announced that he would be a leadership candidate at the party congress in October.
• The referendum on the electoral laws in June failed. As a result, the winning coalition rather than the largest party will continue to receive the bonus seats in parliament, thus maintaining the excessive power of small parties.
• On June 26th the government passed a decree law containing a range of measures aimed at mitigating the effects of Italy's worst recession in modern history. But the net cost in 2009 will be only about 0.1% of projected GDP.
• In the first quarter of 2009 GDP contracted by 2.6% compared with the previous quarter and by 6% on the first quarter of 2008.
• The recession may have started to ease in the second quarter. Industrial output picked up in April. Confidence indicators also rose further in June.