Prometeia Quarterly Economic Outlook December 2017

Putting Italian growth to the test


Household spending contributed to the recovery from the 2012-2013 recession, mainly driven by budgetary policy and the purchase of transport equipment. However, from this year the recovery has entered a more mature phase: no longer scattered, but widespread among the various manufacturing sectors and extended to services, with the important contribution of tourism.

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

  • 2017 GDP growth revised upwards to +1.6% from 1.4% in September. The favourable economic conditions will allow growth to reach +1.5% in 2018
  • In Italy foreign demand and tax incentives are also encouraging the start of an expansionary cycle of capital investments and investments in technology (+12% in 2017-18)
  • In contrast to the past few years, fiscal policy will return to a moderately restrictive stance. In 2018, the high government debt will decline, but only gradually (down to 130.5% from 131.8% in 2017), and will continue to represent a risk factor for the economy
  • Monetary policies will move forward cautiously so as to avoid interrupting the recovery abruptly: Prometeia expects that the ECB will not raise interest rates until the end of 2019
  • In the United States, the tax reform will boost GDP in 2018 by a maximum of one tenth of a percentage point and by two tenths of a percentage point in 2019 and 2020
  • The world economy is picking up speed in 2017 (+3.5%), with an average annual growth in global trade close to 5%, mainly due to China's contribution. In 2018 the strong expansion will continue (GDP +3.5%, trade +4.3%), despite the lower contribution of China, the uncertainty surrounding the U.S. tax policy and the geopolitical risks.

Italy surfing the wave of the global recovery: it is time to increase potential growth

Global trade as well as European political and institutional stability support the Italian economy and have allowed it to reach the highest growth rate (+1.6%) of the last 7 years in 2017, exceeded only three times since the establishment of the Eurozone.

Economic indicators are all still on the rise, so 2018 will start buoyantly, thus allowing our country, save for any unexpected shocks, to continue growing at the current rates. 2018 will therefore still be a very good year, which could could take a surprise turn upwards, notwithstanding the possible negative consequences of an election result that would leave the Italian economy without leadership for too long. Prometeia expects a mild slowdown of GDP growth to 1.5%, due to a lower liveliness of exports.

Starting from 2019, this positive scenario will start to be negatively influenced by the change in the stance of the Italian fiscal policy to moderately restrictive, despite the continuation of the expansionary monetary stance. The stronger Euro and prices will interfere with the recovery and, from 2020 onwards, monetary policies will also gradually reduce their support to growth. Prometeia, therefore, estimates that the growth rate of the Italian economy will slow down and will be closer to 1%, more in line with the country's growth potential.

Prometeia believes that there is a need - within a global context that will remain favourable for the next year - to devote resources to an investment cycle that, by expanding production capacity, can increase productivity, and therefore the Italian growth potential.


US and Chinese reforms under scrutiny

The tax reform in the United States - the first real political success of the Trump administration - aims at reducing taxes for businesses and households to free up resources in support of domestic investment and private consumption. On the international markets, the return of foreign revenues could increase the demand for US dollars thereby pushing the US currency upwards. Consequently, emerging countries with a high accumulation of dollar denominate debt will find themselves in a difficult position. At the same time, countries where the production activities of American multinationals are located may experience a reduction in resources, thus penalising their growth. US fiscal policy finds itself in a phase of economic recovery that would require productivity measures rather than an impulse to overcome a cyclical slowdown. In Prometeia’s 2020 scenario, the reform will boost GDP growth by two tenths of a percentage point per annum, which is not sufficient to exert significant upward pressure on domestic prices.

After the Party Congress, China has entered a stronger political leadership phase that could accelerate the process of reforming the domestic financial markets. Foreign companies will be able to hold the majority of joint ventures with Chinese financial institutions. At the same time, in order to contain “shadow banking”, common rules have been introduced for the management of assets, which are going to be applied to all operators. Meanwhile, the economy continues along the expected growth path. After the exhaustion of the impulse from the budget policy, investments are slowing down, trade is growing at a single-digit rate, the yuan has stabilized and the slowing down of Chinese demand is reducing the pace at which international prices for raw materials are expanding. If GDP growth at the end of 2017 is above the government’s target, there are a number of elements that suggest that growth in 2018 might be less dynamic. Therefore, the contribution of China to the world economy will be modest.