2012-10-14 16:09:47 - New Country Reports market report from Business Monitor International: "Italy Business Forecast Report Q4 2012"

Core Views Mario Monti's technocratic government will seek to implement further structural reforms. The coming months are likely to see the conclusion of a comprehensive spending review, reforms to the funding of political parties and plans to streamline Italy's sclerotic legal system. However, with previous reform efforts having been diluted, we do not expect radical reforms given that the government is already hemorrhaging popular support. The implementation of a series of austerity packages, both under Mario Monti and his predecessor Silvio Berlesconi, have improved Italy's fiscal trajectory. However, the size of the country's debt load and the gradual pace at which we expect it to be reduced will make Italy vulnerable to instability in the eurozone. A major debt restructuring

or outright monetisation by the European Central Bank are serous risks. Italy's current account deficit will shrink to 2.3% of GDP in 2012, from 3.2% in 2011, as fiscal consolidation and uncertainty about the wider eurozone economy dampen the demand for imports. The improvement in net exports will only be partially offset by weaker demand for Italian exports from the eurozone. Major Forecast Changes Notwithstanding our positive view for the government's dedication to fiscal consolidation and economic growth, we currently forecast real GDP growth dropping by 1.6% in 2012, down from 0.5% growth in 2011. This negative result will be driven by the compression effect owing to Prime Minister Monti's upcoming supply-side measures, a slowdown in Italy's main export markets - with the eurozone currently expected to contract by 0.5% in 2012 - and heavy fiscal consolidation measures that will lead to a contraction of domestic demand. We expect the current account deficit to come in at 2.3% of GDP in 2012, down from our previous estimate of 2.8%. We had always expected fiscal consolidation and a wider recession to reduce the deficit, but we adjusted our estimate in light of a lower-than-expected 2011 current account deficit of 3.2% of GDP. Key Risks To Outlook Upside Risks To Deficit Forecasts: A stalling economy could see the government miss its fiscal targets of a balanced budget by 2014. Moreover, given that Italy has the third-largest sovereign debt load in the world, an increase in servicing costs would further accentuate the debt burden. The political parties that support Monti's technocratic government may force an early election. The major parties performed poorly in local elections in May, while the government's austerity measures are increasingly unpopular. An early electio


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