IMF Executive Board Concludes 2018 Article IV Consultation with Italy

IMF News, February 6, 2019

Source details

Canonical URL: IMF Executive Board Concludes 2018 Article IV Consultation with Italy

On January 25, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the 2018 Article IV consultation with Italy.
The Italian economy has been recovering modestly from the global financial and euro area sovereign debt crises.
Recent outcomes:
- Employment and labor force participation have risen.
- Unemployment has fallen.
- Banks’ nonperforming loans have declined.
- Real incomes per capita remain near the level of two decades ago and have fallen steadily behind euro area peers.
- Poverty rates are elevated.
- Public debt is very high.
After growing by 1.6 percent in 2017, growth slowed in 2018 due to slower euro area growth, adverse terms of trade, and higher domestic policy uncertainty (evidenced in elevated sovereign borrowing costs).
Growth projections stated: 1 percent in 2018, 0.6 percent in 2019, and below 1 percent in 2020 and beyond.
The government that took office in June 2018 intends to lift growth and social outcomes through measures to facilitate early retirement, tackle poverty, undertake active labor market policies, and increase public investment.

Directors noted longstanding structural weaknesses contributing to:
- Sluggish income growth.
- Elevated unemployment.
- High public debt.
Directors welcomed:
- Authorities’ focus on supporting growth and improving social outcomes.
- Recent moderation of the 2019 fiscal plans.
- Authorities’ intention to put high public debt on a firm downward path, given downside risks.
Directors cautioned that the authorities’ strategy falls short of comprehensive reforms needed to address longstanding structural impediments, which risks leaving the economy vulnerable.
Priority recommended: implement a comprehensive package of structural reforms, growth-friendly and inclusive fiscal consolidation, and further strengthen bank balance sheets.

Emphasized decisive structural reforms to raise productivity and unlock Italy’s potential.
Welcomed recent measures:
- Adoption of the new general insolvency framework.
- The anti-corruption law.
- Measures to enhance public investment management.
- Authorities’ intention to cut red tape and simplify administrative procedures.
Additional recommendations:
- Liberalize product and service markets.
- Reduce the size of and uncertainty over dismissal costs.
- Decentralize wage bargaining (noting potential political economy challenges).
- Implement reforms as a comprehensive package to yield synergies, reduce structural unemployment, and raise productivity and investment.
- Further progress in streamlining procurement and reforming local state-owned enterprises.

Credible and high-quality fiscal consolidation is key to putting public debt firmly on a downward path and reducing sovereign spreads.
Directors recommended a gradual and balanced adjustment toward a small overall surplus in the medium term.
- Some Directors supported a consolidation pace broadly consistent with the preventive arm of the Stability and Growth Pact.
Fiscal adjustment should be underpinned by high-quality measures to promote growth and social inclusion.
Specific fiscal measures recommended:
- Protect the poor by means of a modern guaranteed minimum income program.
- Reduce current spending.
- Avoid reversing past pension reforms.
- Raise public investment.
- Broaden the tax base, including by addressing large VAT compliance gaps.
- Rationalize other tax expenditures.
- Avoid tax amnesties.
- Prioritize strict enforcement.
- Introduce a modern property tax on primary residences.
- Lower the tax wedge on labor.

Safeguarding public finances is essential to financial sector stability.
Directors welcomed progress in reducing non-performing loans, increasing provisions, and building capital buffers.
Noted challenges: weak profitability and sustained high sovereign yields pose challenges to the banking system.
Encouraged further steps to strengthen the banking system:
- Continue reducing costs and non-performing loans.
- Strengthen bank governance.
- Complete consolidation of cooperative banks into three new banking groups promptly, subjecting all three groups to asset quality reviews.
- Swift recapitalization of weaker banks or timely and effective use of the resolution framework to address outstanding weaknesses and avoid excessive costs to taxpayers and the rest of the banking system.

Real GDP:
- 2017: 1.6
- 2018: 1.0
- 2019: 0.6
- 2020: 0.9
- 2021: 0.7
Real domestic demand:
- 2017: 1.3
- 2018: 1.1
- 2019: 0.8
Final domestic demand:
- 2017: 1.7
Private consumption:
- 2017: 1.5
Public consumption:
- 2017: -0.1
- 2018: 0.3
- 2019: 0.5
Gross fixed capital formation:
- 2017: 4.3
- 2018: 3.2
- 2019: 1.4
Stock building 1/:
- 2017: -0.3
- 2018: 0.1
- 2019: 0.0
Exports of goods and services:
- 2017: 5.7
- 2018: 2.4
- 2019: 1.8
Imports of goods and services:
- 2017: 5.2
- 2018: 3.1
- 2019: 2.0
- 2020: 2.1
Savings 2/ (percent of GDP):
- 2017: 20.4
- 2018: 20.7
- 2019: 20.6
- 2020: 20.3
Investment 2/ (percent of GDP):
- 2017: 17.6
- 2018: 18.3
- 2019: 18.2
- 2020: 18.5
- 2021: 18.7
- 2022: 18.9
Potential GDP (resource utilization):
- 2017: 0.4
Output gap (percent of potential):
- 2017: -1.5
- 2018: -0.9
- 2019: -0.6
- 2020: -0.2
Employment:
- 2017: 1.2
Unemployment rate (percent):
- 2017: 11.3
- 2018: 10.7
- 2019: 10.5
- 2020: 10.3
- 2021: 10.1
- 2022: 10.0
- 2023: 9.9
Prices:
- Hourly compensation 3/: 1.9
- Productivity 3/: 0.2
- Unit labor costs 3/: -1.0
Fiscal indicators:
- General government net lending/borrowing 2/:
- 2017: -2.4
- 2018: -1.9
- 2019: -2.1
- 2020: -2.9
- 2021: -3.0
- General government gross debt 2/:
- 2017: 131.2
- 2018: 131.4
- 2019: 130.9
- 2020: 130.7
- 2021: 131.0
- 2022: 131.1
External sector:
- Current account balance: 2.8
- Trade balance: 2.7

Sources for the indicators: National Authorities; and IMF staff estimates.

Footnotes included in the original indicators:
- 1/ Contribution to growth.
- 2/ Percent of GDP.
- 3/ In industry (including construction).
- 4/ Primary revenue minus primary expenditure.

IMF Executive Board Concludes 2018 Article IV Consultation with Italy, February 6, 2019.