ITALY - OECD.org

1 3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD economic OUTLOOK, VOLUME 2018 ISSUE1 PRELIMINARY VERSION OECD 2018172 ITALYG rowth is projected to edge down to in 2018 and in 2019. Exports andbusiness investment are increasingly driving the recovery. Private consumption growthwill moderate due to waning job growth and weaker household purchasing power dueto rising inflation. Consumer price inflation is edging up as excess capacity narrows andwill accelerate in 2019. The current account surplus is projected to remain stock of non-performing loans in the banking system has declined markedlyfrom its peak thanks to policies put in place. In 2018, the fiscal stance is projected to beslightly expansionary. Reflecting perceived increased policy uncertainty, governmentbond yields have risen recently. Possible policy changes by the incoming government arenot incorporated in the projection.

2 Priorities should be given to shifting the spendingmix towards infrastructure and enhancing targeted anti-poverty programmes to tacklelarge social and regional divides while boosting investment and exports are sustaining growthBusiness investment is expanding solidly, supported by tax incentives, linked to theIndustry plan, and the revival of bank lending to firms. Banks' credit standards haveeased and demand for loans to finance fixed investment is rising. According to surveys, agrowing share of firms plan to further increase their investment in 2018. Residentialinvestment is edging up and demand for mortgages by households has been expanding forsome time. House prices may have finally stopped falling and construction is picking , public investment continues to stagnate, hampered by problems related to theimplementation of the new public procurement code and spending growth is buttressing exports.

3 Increasing specialisation in sectors less exposedto competition from low-cost producers and quality upgrading are resulting in highermarket shares, despite rising relative unit labour costs. The unemployment rate isdeclining gradually but job growth has lost some vigour. Also, the quality of job creationItaly1. Adjusted for effect of Real gross fixed capital :OECD economic Outlook 103 database; and Bank of 2 30 20 1001020 30 20 1001020200920112013201520172019Y o y % changes Exports of goods and servicesImports of goods and servicesExports and imports are growing fast 15 10 5051015 15 10 5051015200920112013201520172019Y o y % changes Y o y % changes Bank lending to non financial corporations (NFCs) Real investment Bank lending is supporting investment3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD economic OUTLOOK, VOLUME 2018 ISSUE1 PRELIMINARY VERSION OECD 2018173 ITALY .

4 Demand, output and prices1 2 prices EUR billionGDP at market prices1 Private consumption Government consumption Gross fixed capital formation Final domestic demand1 Stockbuilding1 Total domestic demand1 Exports of goods and services Imports of goods and services Net exports1 Memorandum itemsGDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP) 1.

5 Contributions to changes in real GDP, actual amount in the first column. 2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco. Source: OECD economic Outlook 103 database. Percentage changes, volume(2010 prices)Italy1. Harmonised consumer price index (HICP).Source:OECD economic Outlook 103 2 8 6 4 20246 8 40420112013201520172019Y o y % changes Nominal wagesHeadline inflation Net household disposable income, realRising price inflation and moderate wage growth curb household purchasing power gains02468101214 of labour force Y o y % changes Unemployment rate Employment Unemployment is gradually declining but employment growth has slowed3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD economic OUTLOOK, VOLUME 2018 ISSUE1 PRELIMINARY VERSION OECD 2018174has worsened as temporary contracts account for most of the new jobs.

6 Public-sectorwageswillincreasein2018fort hefirsttimein10years,butampleslackinthel abourmarket is curbing private-sector wage growth, which, along with rising inflation, iscurtailing real household disposable income growth. Leading economic indicators suggestthat the economy may be losing regional and social divides requires policy actionsProgress on structural and social policy reforms and continuing prudent fiscal policies arekey to boosting growth and tackling social and regional divides. The employment rate hasreached 58%, close to its historical high, but it is still one of the lowest among OECD southern regions, the employment rate is more than 20 percentage points lower than innorthern ones and poverty is substantially higher. Joblessness and poverty are particularly highamong women and young people. Shifting the spending mix towards infrastructure to betterconnect southern regions with the north and the rest of Europe, and enhancing targetedanti-poverty programmes would contribute to reduce such divides while boosting growth.

7 Therecent steps to encourage decentralised wage bargaining hold the promise of better aligningwages to productivity and encouraging hiring in low-productivity and high-unemploymentregions. A permanent cut in social security contributions would further boost job the personal income tax system should aim at fighting tax evasion simplifying taxexpenditures and lowering tax rates for low-income earners, without diminishing tax strategy of stabilising the banking sector through a mix of recapitalisation andresolution is paying off. The stock of non-performing loans in banks balance sheets hasdeclined by about 20% from its peak, following large sales in the secondary market. Banks governance reforms along with the ongoing economic expansion are improving loanquality. The ratio of new non-performing loans to outstanding loans has fallen to belowpre-crisis cost of the government intervention in the banking sector has been limited andled to a revision of the 2017 headline budget deficit from to of GDP.

8 Public debt asa share of GDP remains high but has finally started to decline, despite the assumption ofsome contingent liabilities related to the intervention in the banking 2018, the fiscal stance will be weakly expansionary and the budget deficit will fall of GDP. Based on legislated measures, in 2019 the hike in indirect taxes for of GDP will turn the fiscal stance contractionary and the budget deficit will diminishto of GDP. These projections are based on legislated measures and do not take intoaccount the policies envisaged by the incoming is projected to edge downEconomic growth is projected to decelerate as investment growth will abate, thoughremain robust, while subdued employment and wage growth will mitigate privateconsumption growth. Exports growth is projected to decline due to slackening externaldemand, while slowing investment and private consumption will lessen import uncertainty could have an impact on the economic expansion.

9 Investment couldprove more resilient than projected if firms expand capacity further and residentialinvestment rebounds. If international tensions in the Mediterranean region were todiminish, social strains due to the large influx of refugees would ease, boosting confidenceand exports towards trade partners in the region. The expansionary fiscal stance inGermany could support exports more than expected.