Country Report Italy May 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 cohesion 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 4.6% in 2009 and by 0.6% in 2010.
The fiscal deficit is forecast to rise from 2.7% of GDP in 2008 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, up from 105.8% 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 interest rates do not rise sharply.
Inflation (EU harmonised measure) will average 0.6% in 2009 and 0.9% in 2010, well down on 3.5% in 2008, reflecting weak demand and lower commodity prices.

In early May it was announced that Mr Berlusconi's wife was seeking a divorce, following another public spat with her husband. Opinion polls suggest that it has not had an immediate impact on his high approval ratings.
Mr Berlusconi has announced that the G8 summit of leading industrialised nations will be held in the earthquake-devastated city of L'Aquila rather than on the exclusive island of La Maddalena near Sardinia.
Lega Nord objections have forced the government not to hold the electoral law referendum on the same day as the European Parliament elections. The Lega is opposed to the proposed changes, which would be unfavourable to small parties.
Tensions within the ruling coalition have continued over the governments tough immigration policy, which is being led by the Lega.
New public finance projections published in April showed a sharp deterioration compared with the February Stability Programme, reflecting mostly the impact of the deepening recession rather than a change in fiscal policy.
On a calendar-day adjusted basis industrial output fell by a massive 21% in the first quarter of 2009 following a fall of 10.2% in the fourth quarter of 2008.
In April business and consumer confidence indictors were up, suggesting that the decline in the Italian economy may be starting to bottom out.

Source: Country Report

This report covers the following industry codes:
SIC Code: 53;59
NAICS Code: 44