Country Report Italy September 2008

Outlook for 2008-09

• 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 be 2% of GDP in 2008, rising to 2.6% in 2009, as growth will remain weak and measures adopted to cut the deficit are likely to be difficult to implement.
• GDP growth is forecast to slow from 1.4% in 2007 to 0-0.5% in 2008-09. Inflation (EU harmonised measure) will rise from 2% in 2007 to 3.8% in 2008, then ease to 2.7% in 2009.

Monthly review

• Mr Berlusconi has moved closer to fulfilling his electoral pledge to keep the state-controlled airline, Alitalia, in domestic hands. However, the cost to taxpayers of the sale to a consortium of Italian investors will be high.
• The government has signed an agreement to compensate Libya for Italy's colonial rule. In exchange Libya has promised to co-operate with Italy to stem the flow of illegal immigrants. Italian firms are also expected to benefit.
• The government has pushed ahead with its reform programme, which is aimed at achieving a balanced budget by 2011, but short-term fiscal pressures have increased.
• In the second quarter of 2008 GDP contracted by 0.3% compared with the previous three months and remained flat year on year.
• In August consumer confidence bounced back from a 15-year low in July, but it remained at very low levels.
• The value of retail sales contracted by 3.4% year on year in June, confirming the weakness of consumer spending.
• Consumer price inflation appeared to level off in August. Although the EU harmonised measure rose to 4.2% from 4% in July, the index was unchanged compared with the previous month.
• The Milan bourse general share price index has continued to decline. At the end of August it was down by 2.2% month on month and by 27% year on year.

Source: Country Report