2013-01-15 13:39:18 - Italy Business Forecast Report Q1 2013 - a new country guide report on companiesandmarkets.com

Our core view remains that Mario Monti´s reform drive will not be rolled back after the spring 2013 general election, given the likelihood of the moderate centre-left Democratic Party leading the next government, combined with external constraints facing Monti´s successor. However, anti-austerity and anti-euro rhetoric is likely to pick up ahead of the election, roiling financial markets.

The implementation of a series of austerity packages, both under 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 serious

 

 

risks.

Italy´s external adjustment is lagging that of other periphery economies, as measured by current account balances and unit labour costs.

However, Italy requires a smaller adjustment than its peers, and we expect Italy´s external position to continue to improve gradually.

Major Forecast Changes

We forecast the Italian economy to contract by 2.3% in 2012 and then 0.2% in 2013 as the eurozone begins its gradual recovery, boosting exports and business confidence, while credit conditions simultaneously ease. However, Italy´s large public debt load and weak domestic demand leave the economy vulnerable to external shocks.

Having rallied into the third quarter following the European Central Bank´s pledge to purchase encumbered eurozone sovereign debt (conditional on the target member state first agreeing to a structural macroeconomic adjustment programme), the euro is now hovering around US$1.3000/EUR. This would ordinarily suggest potential for a more pronounced rally towards US$1.4000-1.4500/EUR.

However, we believe that while momentum could carry the euro towards US$1.3500/EUR, this would eventually give way to a fresh round of depreciation.

Key Risks To Outlook

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 rise of comedian Beppe Grillo´s Five Star Movement (M5S), which calls for Italy to default on its debt and for a referendum on euro membership, is a major political risk for investors. M5S has seen its popularity surge from around 5% at the beginning of 2012 to 20% by the summer, securing several mayorships at the May 2012 local elections and winning the largest share of the vote (14.9%) at the election for Sicily´s regional assembly in October 2012.

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