IMF Executive Board Concludes 2016 Article IV Consultation with Italy
IMF News, July 12, 2016
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- Published: July 12, 2016
Recent economic performance
- The Italian economy "grew by 0.8 percent in 2015 and continued to expand in the first quarter of 2016."
- Recovery drivers cited: "exceptionally accommodative monetary policy, favorable commodity prices, supportive fiscal policy, and improved confidence on the back of the authorities’ wide-ranging reform efforts."
- Labor market and banking indicators:
- "Labor market conditions have been improving gradually."
- "Nonperforming loans (NPLs) appear to be stabilizing at around 18 percent of total loans."
- Structural constraints noted: "Productivity and investment growth are low; the unemployment rate remains above 11 percent, with considerably higher levels in some regions and among the youth; bank balance sheets are strained by very high NPLs and lengthy judicial processes; and public debt has edged up to close to 133 percent of GDP, a level that limits the fiscal space to respond to shocks."
Outlook and risks
- Growth projections: "Growth is projected to remain just under 1 percent this year and about 1 percent in 2017."
- Long-term implications: "This growth path would imply a return to pre-crisis (2007) output levels only by the mid-2020s and a widening of Italy’s income gap with the faster growing euro area average."
- Main downside risks identified: "financial market volatility, the refugee surge, and headwinds from the slowdown in global trade."
- Balance sheet repair: "It also implies a protracted period of balance sheet repair, and thus of vulnerability."
Structural reforms and implementation priorities
- Authorities have "embarked on a range of very important reforms, including institutional, public administration, fiscal, labor market, and banking sector reforms."
- Recommended focus areas to boost growth and build buffers:
- "Fully carry out and deepen" ongoing reform efforts.
- "Timely implementation of complementary and mutually reinforcing efforts in the financial and fiscal sectors and structural measures."
- Take advantage of favorable tailwinds: "monetary easing, low commodity prices and fiscal support."
Executive Board assessment and policy recommendations
- Overall judgment: Recovery is underway but "likely to be modest" given external and domestic constraints; Directors "urged the authorities to fully implement and deepen the reforms to strengthen near-term growth, further build up buffers, enhance resilience, and bolster economic performance over the medium term."
- Labor market and product market advice:
- Welcome "the implementation of the Jobs Act and the approval of a framework law on public administration reform."
- Support "implementation of active labor market policies" noting "high youth unemployment and low female labor participation."
- Call for "ambitious product and service market reforms, including a strengthened Annual Competition Law; modernizing the wage bargaining system to align wages with productivity at the firm level; and implementing public administration reforms decisively, including to lower the cost of doing business and improve the investment climate."
- Financial sector recommendations:
- Commendation for "recent insolvency reforms, the framework for bank consolidation, and steps to address nonperforming loans (NPLs)."
- Further measures supported to reduce NPLs and lower cost of risk:
- "More intensive use of out-of-court debt restructuring mechanisms;"
- "Strengthened supervision;"
- "A systematic assessment of asset quality for banks not already subject to the ECB comprehensive assessment, with follow-up actions in line with regulatory requirements."
- Note importance of "effective use of the framework for the prompt resolution of banks" and managing concerns "related to the bail-in of retail investors."
- Fiscal policy and public debt guidance:
- Emphasize need to "balance efforts to reduce debt with support for growth."
- Directors noted "debt dynamics are expected to decline only gradually in the coming years and remain vulnerable to shocks."
- Recommended fiscal strategies:
- "Move forward decisively on pro-growth reforms, giving greater priority to lower and more efficient spending and less distortive taxation, including broadening the tax base and introducing a modern real estate tax."
- Many Directors recommended "an evenly-phased adjustment over 2017–19, net of any remaining upfront costs from structural reforms, to achieve a small structural surplus."
- A number of other Directors "saw merit in backloading adjustment to cushion the impact on growth, while considering a balanced budget as an appropriate medium-term objective," and urged attention to managing risks, "including through ambitious privatization efforts."
Selected economic indicators (staff estimates and projections as of June 20, 2016)
- Real Economy (change in percent)
- Real GDP: 2013: -1.7; 2014: -0.3; 2015: 0.8; 2016: 1.1; 2017: 1.3
- Final domestic demand: 2013: -2.7; 2014: -0.4; 2015: 0.6
- Exports of goods and services: 2013: 3.1; 2014: 4.3; 2015: 3.8
- Imports of goods and services: 2013: -2.3; 2014: 3.2; 2015: 6.0; 2016: 2.4; 2017: 4.4
- Consumer prices: 2013: 1.2; 2014: 0.2; 2015: 0.1; 2016: 0.0; 2017: 0.7
- Unemployment rate (percent): 2013: 12.1; 2014: 12.6; 2015: 11.9; 2016: 11.4; 2017: 10.9
- Public Finances
- General government net lending/borrowing 4/: 2013: -2.9; 2014: -3.0; 2015: -2.6; 2016: -2.4; 2017: -1.9
- Structural overall balance (percent of potential GDP): 2013: -0.6; 2014: -1.1; 2015: -0.7; 2016: -1.2
- General government gross debt 4/: 2013: 128.9; 2014: 132.5; 2015: 132.7; 2016: 132.9; 2017: 132.1
- Balance of Payments (percent of GDP)
- Current account balance: 2013: 0.9; 2014: 1.9; 2015: 2.2; 2016: 2.1; 2017: 1.7
- Trade balance: 2013: 3.0; 2014: 2.9
- Exchange Rate
- Exchange rate regime: "Member of the EMU"
- Nominal effective rate: CPI based (2000=100): 2013: 100.0; 2014: 100.7; 2015: 96.9
- Notes:
- "Sources: National Authorities; and IMF staff calculations."
- "1/ Staff estimates and projections as of June 20, 2016 (pre-Brexit referendum), unless otherwise noted, based on fiscal plans included in the government's April 2016 Documento di Economia e Finanza and subsequent approved measures."
- "2/ Percent of GDP."
- Explanatory notes on Article IV consultations and Executive Board summing up are provided in the original release.
Press Release No. 16/329 — IMF Executive Board Concludes 2016 Article IV Consultation with Italy (July 12, 2016).