Country Report Italy October 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 beyond 2009.
• 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.
• There has been a shift in emphasis on foreign policy under Mr Berlusconi. His preferred approach of bilateral relations with strategically important countries and his lack of tact will make agreeing common EU positions difficult.
• 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.
• We expect the impact of the global financial crisis to cause GDP to contract in 2008 and 2009. A modest recovery is forecast in 2010, but this will depend on an improvement in credit conditions and sentiment.
• Consumer price inflation appears to have peaked at 4.1% in August. We expect a decline from an estimated average of 3.6% in 2008 to 1.7% in 2010.

Monthly review

• The battle between Mr Berlusconi and the judiciary has shown no sign of abating. On September 26th a Milan court referred to the constitutional court a law granting the prime minister immunity from prosecution.
• In September the European Commission threatened legal action against Italy if it failed to change a law allowing the automatic expulsion of EU citizens found guilty of offences carrying a jail sentence of more than two years.
• On October 8th the government adopted measures to bolster confidence in banks as the global financial crisis worsened. The minister of the economy, Giulio Tremonti, insists that they are sound, but bank shares have plummeted.
• The government has kept the budget deficit estimate for 2008 unchanged at 2.5% of GDP, despite downgrading its growth projection.
• In late September the trade unions agreed to the government-backed plan to sell the state airline, Alitalia, to a consortium of 16 Italian entrepreneurs.
• GDP contracted by 0.3% in the second quarter of 2008 compared with the previous three months. The industrial output index declined month on month by 1.1% in July, after falling by 0.2% in June and 1.6% in May.
• Consumer price inflation decelerated to 3.8% in September from 4.1% in August as food price increases slowed and oil prices fell.

Source: Country Report