Gli scenari macroeconomici: crisi del debito, spinte recessive e

From frog to princess? The Italian recovery
and the challenge of the global slowdown
Luca Mezzomo
Macroeconomic Analysis
Intesa Sanpaolo
Lugano, 24 novembre 2015
November 2015
Five questions on Italy’s economic outlook
 What is driving Italy’s economic recovery? How sustainable is
it? Is the slowdown of developing countries a threat?
 Where do we stand in terms of government debt sustainability?
 Should we expect any impact on GDP growth from structural
reforms?
 Is political instability a risk?
 Is there a chance of credit rating upgrades in the near future?
1
Here comes the sun
Real GDP growth (%, y/y)
Source: Thomson Reuters-Datastream Charting, ISTAT, Eurostat and Intesa Sanpaolo calculations
2
GDP growth weaker q/q, stronger y/y
Contribution to GDP growth
Source: Thomson Reuters-Datastream Charting, ISTAT and Intesa Sanpaolo calculations
3
Stronger fundamentals in the household sector
Employment was boosted by reforms in 2014-15


Employment growth (induced by reforms
and tax incentives), the release of
purchasing power due to falling energy
prices and tax cuts have supported real
disposable income in 2014-15.
Real consumer spending is slowly
recovering from lows.
Stronger confidence points to
rising consumer spending
Personal Income slowly recovers
Source: Intesa Sanpaolo calculations on Istat, EU Commission data
4
The outlook for fixed investment is improving
Rising GDP, easier access to (cheap) credit and fiscal measures will lead to a recovery of
capital spending by business firms.
Capital spending will be supported
by improving economic outlook…
..and by the easing of credit standards
Source: Intesa Sanpaolo calculations on Istat and ECB data
5
Financial conditions are more supportive
Lending rates, %: house and consumer loans
Lending rates, %: non-financial corporations
Bank Lending Survey
Loan volumes
6
Risks on exports: how serious is the threat?
Emerging markets and Greece represent a small but significant share of total exports.
This may explain the subdued performance of 2015. The outlook is mixed.
Export shares of some countries/areas (% of total exports) and % change in the value of exports
Source: Istat and Intesa Sanpaolo calculations.
7
Exports lost strength in Q3
Export growth slowed down in Q3,
led by weaker non-EU demand
The exchange rate is still supportive
Source: Istat, Markit, BIS and Intesa Sanpaolo calculations.
8
Italy - baseline macroeconomic scenario 2015-16
GDP (constant prices)
2014
2015
2016
-0.4
0.8
1.2
- q/q change
Personal consumer spending
2015
2015
2015
2015
2016
2016
2016
2016
1
2
3
4
1
2
3
4
0.1
0.6
0.9
1.4
1.2
1.2
1.3
1.2
0.4
0.3
0.2
0.4
0.3
0.3
0.3
0.3
0.4
0.7
1.2
-0.1
0.4
0.5
0.4
0.2
0.2
0.3
0.3
Government consumption
-0.7
0.2
-0.2
0.0
-0.4
0.1
0.0
-0.1
-0.1
0.0
0.0
Fixed Investments
-3.4
0.6
1.9
1.2
-0.4
0.2
0.6
0.6
0.5
0.5
0.6
Imports
2.7
4.8
3.3
2.1
1.8
-0.7
1.0
1.0
0.9
1.0
1.0
Exports
2.8
3.3
3.0
0.7
1.0
-0.9
0.8
1.1
1.0
1.0
1.0
Net exports
0.1
-0.3
0.0
-0.4
-0.2
-0.1
0.0
0.1
0.1
0.0
0.0
-0.5
0.6
1.0
0.1
0.1
0.3
0.3
0.2
0.2
0.3
0.3
Final Domestic Demand
CPI (y/y)
0.2
0.1
1.1
-0.2
0.1
0.2
0.4
1.0
1.0
1.2
1.4
Unemployment (%)
12.7
12.1
11.5
12.3
12.4
11.9
11.8
11.7
11.6
11.4
11.3
Real Disposable Income (y/y)
-0.2
0.6
1.2
Saving rate (%)
8.7
8.5
8.2
Current Account (% GDP)
1.9
2.4
2.7
Percentage change on previous period, if not otherwise stated.
Source: Intesa Sanpaolo.
9
A marked improvement in risk perception
BTP-Bund spread back to 2010 levels
Total Return since July 2012 on some
government bond markets
Source: Thomson Reuters – Datastream Charting
Note: Iboxx Euro Sovereign 1-10Y (except Spain: all)
10
Who kissed the frog?
The turnaround was based on ECB measures, the new institutions set up at
Eurozone level and on the reform efforts of peripherals themselves.
 ESM (European Stability Mechanism) to provide financial
assistance
 ECB measures: full allotment at refinancing operations,
SMP (2010-11), OMTs (announced in 2012), EAPP (asset
purchase programme, 2014-ongoing)
 Banking union (stress tests, SSM, SRM)
 Increased surveillance of macroeconomic imbalances
 Structural reforms in peripheral countries
 Budget cuts (despite weak growth)
11
State-Sector Borrowing Requirement: so far so good
 State Borrowing Requirement fell by 21Bn EUR to 55.8Bn EUR in the first
10 months of 2015.
 The full year target has been revised from 63.9 to 54 billion with the Sept
2015 update to the Economic and Financial Document (DEF).
3,4
0
-3,8
-21,6
-23,4
-20
-29,5
-23,9
-33,8
-31,7
-40
-49,6
-60
-55,8
-80
-100
jan
mar
2014
may
jul
10Y mean
sep
2013
Source: Intesa Sanpaolo research, from Bank of Italy data and MEF press releases.
12
nov
linear projection
The budget and debt outlook: Italy’s m/t fiscal plan
In the Update to its DEF, the Government revised upwards its GDP growth forecasts. In
2016, instead of a +0.1% correction in the structural balance, the Government proposed
a -0.4% easing. Debt is expected to peak in 2015.
2014
Government targets (DEF Update, Sep 2015)
Real GDP (y/y)
Interest outlays, % of GDP
(1)
Overall balance, % of GDP
Primary balance, % of GDP
Structural balance (cyclically adjusted), % of GDP
Government Debt, % of GDP
Intesa Sanpaolo Research (October 2015)
Real GDP (y/y)
Interest outlays, % of GDP
Overall balance, % of GDP
Primary balance, % of GDP
Structural balance (cyclically adjusted), % of GDP
Government Debt, % of GDP
2015f
2016f
2017f
2018f
2019f
-0.4 0.9 (0.7)
4.7 4.3 (4.2)
-3.0 -2.6 (-2.6)
1.6 1.7 (1.6)
-0.7 -0.3 (-0.5)
132.1
132.8
(132.5)
1.6 (1.4)
4.3 (4.2)
-2.2 (-1.8)
2.0 (2.4)
-0.7 (-0.4)
131.4
(130.9)
1.6 (1.5)
4.1 (4.0)
-1.1 (-0.8)
3.0 (3.2)
-0.3 (0.0)
127.9
(127.4)
1.5 (1.4)
4.1 (3.8)
-0.2 (0.0)
3.9 (3.8)
0.0 (0.1)
123.7
(123.4)
1.3 (1.3)
4.0 (3.7)
0.3 (0.4)
4.3 (4.0)
0.0 (0.2)
119.8
(120.0)
-0.4
4.7
0.8
4.2
1.2
4.0
1.6
3.6
1.5
3.7
1.4
3.6
-3.0
1.6
-0.8
132.3
-2.6
1.6
-0.4
133.0
-2.5
1.5
-1.0
132.0
-1.4
2.3
-0.6
129.1
-0.6
3.1
-0.4
125.4
-0.2
3.4
-0.4
122.0
Source: DEF Update of September 2015 (DEF of April 2015 in brackets), Istat and Intesa Sanpaolo Research forecasts.
13
Improving outlook on both deficit and debt
 In our estimates, the deficit to GDP ratio will improve mainly due to savings
on interest outlays: budget consolidation is far from complete.
 The debt to GDP ratio is expected to peak this year and then start declining,
albeit at a slow pace.
Public balance as % of GDP
Primary balance as % of GDP: forecasts
0,0
-0,5
Govt target
-1,0
ISP forecasts
-1,5
-2,0
-2,5
-3,0
-3,5
2014
2015
2016
2017
2018
Source: MEF and Intesa Sanpaolo forecasts
14
Interest outlays will drop further as % of GDP
 ECB policies and the improvement in the risk outlook will keep refinancing
costs at record low levels for some time, driving further down the average
interest rate on the government debt stock.
5,0
4,5
3,9
4,0
3,5
3,6
3,6
3,5
3,2
3,2
3,5
3,0
3,2
3,0
2,8
2,5
2,3
2,0
1,5
2005
2007
2009
2011
2013
2015
2017
2,4
2019
historical
baseline
stress
Government (apr 2014)
Government (sep 2014)
Government (apr 2015)
Government (sep 2015)
15
The arithmetic of debt sustainability is improving
 The cost of debt is set to run well below “normal levels” for years (3.1% in
2015, and it is not expected to rise in 2016-17)
 Nominal growth of 1.5% per year will be enough to stabilize the debt ratio,
if the primary surplus is held at 2% of GDP.
 For 2016-18, we forecast cost of debt around 3%, primary surplus close to
2%, nominal GDP growth around 2.5%.
Current debt
ratio: ~ 130%
Cost of debt:
~ 3%
Primary balance:
~2%
16
Nominal GDP
growth
consistent with
stable debt
ratios: 1.5%
Should we worry about political risk in Italy?

Confidence in the Renzi Government has suffered an extensive decline from
2014 peaks

Local elections in May 2016 will represent the next test of popular support

Parliamentary approval of the constitutional reform, however, will be the key
test
Confidence in the Renzi Government (%)
Voting intentions (%)
48
45
46
40
44
35
42
30
40
25
38
20
36
15
34
10
32
5
30
0
20/1 20/2 20/3 20/4 20/5 20/6 20/7 20/8 20/9
6-Mar-13
PD
20-Nov-13
21-Jul-14
M5S
Source: Datamedia Ricerche, Istituto Piepoli
17
27-Oct-14
LN+ NcS
3-Feb-15
FI
27-Apr-15
3-Aug-15
FdI
SEL
NCD
Three endgames
• Significant decrease in political
risk
• Renzi may force a snap election
in 2017 (if the recovery
strengthens)
• Most likely outcome
The constitutional reform
gets parliamentary
approval
The constitutional reform
is rejected by the
parliament
The electoral law is
emended to include the
Senate
Same as above
Political crisis, Renzi
resigns
Uncertainty is
back…
18
Summing up…
 Economic recovery will strengthen in 2016, but its pace will stay rather slow
(global environment, uncertainty, legacy problems)
 Emerging markets pose a significant but not decisive threat (and we expect
some to stabilize)
 The outlook for debt sustainability is improving: debt ratio to fall in 2016 for
the first time since the crisis
 Political risk will remain a serious threat until the electoral system is changed
 Scope for over-performance linked to reforms and rating upgrades
19