IMF Executive Board Concludes the 2021 Article IV Consultation with Italy

IMF News, June 3, 2021

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IMF Executive Board Concludes the 2021 Article IV Consultation with Italy

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• Published: June 3, 2021

Summary of economic impact and policy response

• GDP fell by nearly 9 percent in 2020, with much larger drops for contact-intensive services.
• Prompt and decisive policy responses by the Italian authorities, together with coordinated fiscal and monetary responses at the European level, were introduced to cushion the economic impact.
• A large fiscal expansion delivered income lifelines to households and firms.
• Extensive liquidity support was provided, including through debt service moratoria and government guaranteed credits.
• A ban on layoffs was introduced.
• These measures helped to preserve the structure of the economy but may be concealing the extent of underlying weakness in firms’ financial health, labor market slack and loan quality.

Pre-pandemic structural weaknesses and financial sector

• The pandemic interrupted the slow and still incomplete recovery from the double-dip recession that followed the global financial and euro area debt crises.
• Over the past decade:
  • productivity continued to stagnate,
  • the public debt ratio drifted up to high levels,
  • regional income disparities widened.
• Considerable progress had been achieved in reducing banks’ nonperforming loans, but NPL ratios remained above the euro area average.
• Italian banks’ exposure to the domestic sovereign remains high.

Outlook, risks, and recovery drivers

• The economic outlook depends on:
  • the path of the pandemic,
  • the extent of structural change it will usher in,
  • the effectiveness of economic and public health policies.
• Recovery support:
  • Ongoing vaccination campaign.
  • Substantial investment spending under the government’s multi-year National Recovery and Resilience Plan (NRRP), mainly financed by Next Generation EU resources, to increase physical and social infrastructure and support structural reforms.
• GDP is expected to rebound by about 4¼ percent in 2021.
• Increased investment spending would keep growth well-above the previous trend for the next several years.
• Long-run economic scarring could be sizable.
• Near-term risks: speed at which the virus is defeated and the extent of savings drawdown.
• Longer-term risks: preserving favorable financial conditions, adequacy of NRRP implementation and maintaining the political momentum for structural reforms.
• A materialization of these longer-term risks could exacerbate the already high public debt vulnerabilities.

Executive Board Assessment — key messages and recommendations

• Directors commended Italian and European authorities for strong and decisive policies that cushioned social and economic impact of the pandemic.
• A robust recovery is expected in 2021 supported by ongoing vaccinations, although large uncertainty remains.
• Continued policy support will be necessary until the recovery takes hold.
• Prompt and effective implementation of structural reforms is critical to support investment under the NRRP to boost potential growth and foster a green, digital, and more inclusive economy.

Policy recommendations from Directors:

• Fiscal policy should continue to cushion the economic effects of the pandemic through temporary and targeted measures, coupled with a credible plan to significantly reduce public debt ratios over the medium term.
• Swift adoption of growth enhancing reforms, while raising the efficiency and equity of government spending and tax systems.
• Support the financial health of viable firms:
  • State resources could help mobilize private investment, with a prominent role for the private sector in determining viability.
  • Faster procedures for debt restructuring and liquidation of nonviable firms.
• Financial sector monitoring and support:
  • Continue to support bank lending but with improved targeting.
  • Incentives for prudent lending and updating borrower checks for any extension of loan moratoria.
  • Need for a better understanding of loan quality and the proactive classification, provisioning, and expeditious resolution of problem loans.
• Labor market and social policies:
  • Labor market turnover should resume once the health crisis recedes and the firing ban is phased out.
  • Comprehensive upskilling programs together with labor market reforms and enhanced social safety nets to raise productivity and help transition workers into expanding sectors and bring more women and youth into the workforce.
• Public investment and governance:
  • Next Generation EU resources provide an opportunity for a greener and more equitable economy.
  • Public investment should be accompanied by prompt modernization of public administration and the judiciary, efficient public procurement, enhanced public investment governance, and reduced barriers to competition.

Italy: Selected Economic Indicators (as presented)

• Real Economy (change in percent)
  • Real GDP: 2017: 1.7; 2018: 0.9; 2019: 0.3; 2020: -8.9; 2021: 4.3; 2022: 4.0
  • Final domestic demand: 2017: 1.5; 2018: 1.2; 2019: 0.2; 2020: -8.1; 2021: 4.5; 2022: 3.6
  • Exports of goods and services: 2017: 5.4; 2018: 2.1; 2019: 1.6; 2020: -13.8; 2021: 9.5; 2022: 9.0
  • Imports of goods and services: 2017: 6.1; 2018: 3.4; 2019: -0.7; 2020: -12.6; 2021: 9.6
  • Consumer prices: 2017: 1.3; 2018: 0.6; 2019: -0.1; 2020: 0.8; 2021: 1.0
  • Unemployment rate (percent): 2017: 11.3; 2018: 10.7; 2019: 10.0; 2020: 9.3; 2021: 10.3; 2022: 11.6
• Public Finances
  • General government net lending/borrowing 1/ (percent of GDP): 2017: -2.4; 2018: -2.2; 2019: -1.6; 2020: -9.5; 2021: -11. 8; 2022: -6.0
  • Structural overall balance (percent of potential GDP): 2017: -1.7; 2018: -1.8; 2019: -1.0; 2020: -8.0; 2021: -4.5
  • General government gross debt 1/ (percent of GDP): 2017: 134.1; 2018: 134.4; 2019: 134.6; 2020: 155.6; 2021: 159.9; 2022: 157.9
• Balance of Payments (percent of GDP)
  • Current account balance: 2017: 2.6; 2018: 3.3; 2019: 3.7; 2020: 3.5; 2021: 3.1
  • Trade balance: 2017: 2.9; 2018: 2.5; 2019: 3.8
• Exchange Rate
  • Exchange rate regime: Member of the EMU
  • Exchange rate (national currency per U.S. dollar): …
  • Nominal effective rate: CPI based (2000=100): 2017: 100.9; 2018: 103.8; 2019: 102.8

Press Release No. 21/153, June 3, 2021 — IMF Communications Department

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• IMF COVID-19 Hub
• Policy Tracker
• Financial Assistance
• Questions & Answers
• Italy and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• http://www.IMF.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home