Quarterly Economic Outlook September 2017

Europe and Italy: a window of opportunity to implement reforms

Prometeia's Quarterly Economic Outlook - September 2017 - Highlights

Both 2017 and 2018 could represent the opportunity for Europe and Italy to reform the governance of Brussels and secure Rome’s public accounts.



On the European continent, growth is widespread among the countries, monetary policy is – and will continue to be – exceptionally expansionary, national elections have passed without any major obstacle. It therefore seems the right time to accelerate the process of European integration. The stronger Euro contributes to keeping inflation at historically low levels, which represents on the one hand, a reason for concern for the ECB, but supports households and firms’ purchasing power on the other. Prometeia has revised European growth upwards to +2.2% (from 1.9% estimated in July).



For our country, a GDP growth rate of 0.4% for three consecutive quarters (from the last 2016 to the second 2017) was last seen 8 years ago, i.e. during the post-crisis rebound of 2009. For the third time Prometeia has revised GDP growth upwards for 2017 to +1.4% (from 1.2% in July). If the international context plays an important role in this revision, domestic consumption plays just as much of a role, especially household expenditure. However, caution is needed: the appreciation of the Euro, the slowdown of the Chinese economy and the political uncertainty will limit Italy’s growth between the autumn and winter, slowing its quarterly growth pace from 0.4% to 0.2%.

Below are the main themes of Prometeia’s September 2017 Quarterly Economic Outlook.

Italy’s Economic Outlook

  • 2017 GDP growth revised upwards to +1.4% from +1.2% estimated in July, well above potential growth. Half a percentage point is the contribution of the expansionary fiscal policies implemented between 2014 and 2017
  • The Italian public debt is drawing the attention of the markets as well as that of the European partners. Over the period 2018-2020 the 10-year BTP/Bund spread is not expected to fall below 150bp. Prometeia analyzes a strategy to extend the average maturity of public debt and reduce the issuance by 150/200 billion a year over a horizon of 4/5 years

International Economic Outlook

  • The recovery of global trade is surprisingly positive, growing by 4.9% in 2017 and 4.2% in 2018, supported by the growth of the Chinese economy (GDP revised upwards to +6.9% in the current year)
  • The weak inflation and the appreciation of the Euro will postpone the end of QE: Prometeia expects a tapering of €5 billion a month, with the bond-buying programme ending in December 2018

Italian public debt still under the spotlight

Prometeia has analyzed the costs and benefits of a strategy aimed at reducing the issuance by €150/200 billion a year over a horizon of 4/5 years. This should be accomplished through limiting the issuance of treasury bills (BOT) as well as the coverage of matured securities and deficits according to a schedule aimed at extending maturities. Such a strategy could lead to emissions below €220 billion in 2025 and an average residual life of the bond portfolio close to 9 years. In addition, it could lead to increasing the cost for public finances by around €5 billion a year, compared to the baseline scenario where securities are renewed according to their original maturity. With a caveat: after years of interest rates at a record low level, the cost of refinancing will necessarily return to increase and the interest payment will follow suit. The extension will therefore imply a modest but additional burden on public finances. Thus, the message could be "Ok to extend, but with some moderation", i.e. to proceed with caution on the virtuous road already undertaken by the government.


World trade surprisingly positive

World trade growth was higher than 4% in the first half of 2017, more than doubling the average yearly growth between 2012 and 2016, with an increasing contribution from both industrialized and emerging countries. The appreciation of major currencies against the dollar led to a redistribution of purchasing power, reducing it in the US dollar area and increasing it elsewhere. This, together with a further decline in global inflation, has contributed to the widespread improvement of consumer and business confidence, with positive effects on overall demand. 

In China, the leitmotif is to prepare the country for the Party’s national congress, to be held in October, by strengthening the economy and making clear progress on environmental issues. This is why in the first half of the year GDP growth was higher than the government's target and industrial production was shrinking in some highly polluting sectors such as mining and processing of raw materials. Consequently, imports of commodities increased, with the help of the strong yuan, to substitute low domestic production, thus contributing to the expansionary effects on international prices and global trade. However, growth over and above the official target is also related to this fall’s political deadline. Once over, reforms are expected to be re-launched in the coming years and the pace of China’s growth is also expected to fall, with all the downsides that come with it at global level.


ECB towards cautious tapering

The recovery of the European economy allows the ECB to begin discussions on tapering QE. However, the change of the Eurosystem’s bond-buying programme after 2017 will need to be closely monitored because of its potential restrictive effects arising from the increase of market rates as well as an additional exchange rate appreciation.

Until the end of 2017, the Eurosystem will continue to buy government bonds for a value of €60 billion a month.  Beginning from 2018, Prometeia assumes a gradual reduction of the amount of bonds purchased. In particular, we hypothesize that over the tapering period, new monthly purchases will amount to €5 billion less than those of the previous month, until December 2018 when the bond-buying plan will end. Such a hypothesis will allow the ECB a progressive change in its non-conventional monetary policy, while complying with the issuer and issue limits of 33% and 25% respectively.