Country Report Italy March 2009

Summary

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 effectiveness 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 3.6% in 2009 and by 0.6% in 2010. There are still downside risks, even to this negative outlook.
The fiscal deficit is forecast to rise from 2.7% of GDP in 2008 to 4.5-5% of GDP in 2009-10. The public debt/GDP ratio is expected to be about 117% by the end of 2010, up from around 108% 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.
Inflation (EU harmonised measure) will average 0.9% in 2009 and 1.1% in 2010, well down on 3.5% in 2008, reflecting weak demand and lower commodity prices.

On February 17th Walter Veltroni resigned as leader of the centre-left Partito Democratico (PD), the largest opposition party, following his party's defeat in local elections in Sardinia.
Mr Berlusconi clashed with the president, Giorgio Napolitano, after the head of state refused to sign into law a decree that would have forced doctors to continue feeding an Italian woman at the centre of a right-to-die case.
On February 25th the cabinet approved a decree allocating 12bn to help banks rebuild their capital base, should the need arise. The crisis in Eastern Europe has made that more likely, given the exposure of a few major banks.
In February-March the government announced a series of measures aimed at supporting key industries, such as the automotive, white goods and construction sectors, and protecting low-income groups and the unemployed.
In the fourth quarter of 2008 GDP fell by 1.8% quarter on quarter and by 2.6% year on year, the largest contractions in 28 years.
Industrial production, excluding construction, fell sharply for the fourth month in a row in December. On a seasonally and working-day adjusted basis, output fell by 2.5% month on month.

Source: Country Report