IMF Executive Board Concludes 2018 Article IV Consultation with Italy

February 6, 2019

On January 25, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the 2018 Article IV consultation [1] with Italy.

The Italian economy has been recovering modestly from the global financial and euro area sovereign debt crises. Employment and labor force participation have risen, unemployment has fallen, and banks’ nonperforming loans have declined. Nevertheless, significant challenges remain. Real incomes per capita are still near the level of two decades ago and have fallen steadily behind euro area peers, poverty rates are elevated, and public debt is very high.

After growing by 1.6 percent in 2017, the fastest in nearly a decade, economic growth slowed in 2018. This reflected slower euro area growth, adverse terms of trade, and higher domestic policy uncertainty as evidenced in elevated sovereign borrowing costs. Growth is projected at 1 percent in 2018, 0.6 percent in 2019, and below 1 percent in 2020 and beyond.

The new government, which took office in June 2018, intends to lift growth and social outcomes. It is implementing measures to facilitate early retirement, tackle poverty, undertake active labor market policies, and increase public investment, among others.

Executive Board Assessment [2]

Executive Directors noted that Italy’s longstanding structural weaknesses have contributed to a challenging economic situation, including sluggish income growth, elevated unemployment, and high public debt. They welcomed the authorities’ focus on supporting growth and improving social outcomes as well as the recent moderation of the 2019 fiscal plans. Directors welcomed the authorities’ intention to put high public debt on a firm downward path, in view of the downside risks. They generally noted, however, that the authorities’ strategy falls short of comprehensive reforms needed to address the longstanding structural impediments to sustained growth and, therefore, risks leaving the economy vulnerable. They recommended that priority needs to be given to implementing a comprehensive package of structural reforms, growth-friendly and inclusive fiscal consolidation, and further strengthening bank balance sheets.

Directors emphasized that decisive structural reforms to raise productivity and unlock Italy’s potential are critical to improve economic outcomes and enhance resilience. In this context, they welcomed the adoption of the new general insolvency framework, the anti-corruption law, and the measures to enhance public investment management, as well as the authorities’ intention to cut red tape and simplify administrative procedures. Directors underscored the need to liberalize product and service markets and reduce the size of and uncertainty over dismissal costs. Directors encouraged the authorities to decentralize wage bargaining, although a number of Directors acknowledged potential political economy challenges. They supported implementing these reforms as a comprehensive package that would yield important synergies and reduce structural unemployment as well as raise productivity and investment. Directors also called for further progress in streamlining procurement and reforming local state-owned enterprises.

Directors considered that credible and high-quality fiscal consolidation is key to putting public debt firmly on a downward path and reducing sovereign spreads. They recommended a gradual and balanced adjustment toward a small overall surplus in the medium term. Some Directors concurred with a consolidation pace that is broadly consistent with the preventive arm of the Stability and Growth Pact. Directors emphasized that fiscal adjustment should be underpinned by high-quality measures to promote growth and social inclusion. They underscored the need to protect the poor by means of a modern guaranteed minimum income program, reduce current spending, avoid reversing past pension reforms, and raise public investment. Directors also highlighted the need to broaden the tax base—including by addressing large VAT compliance gaps, rationalizing other tax expenditures, avoiding tax amnesties, prioritizing strict enforcement and introducing a modern property tax on primary residences—and lower the tax wedge on labor.

Directors emphasized that safeguarding public finances is essential to financial sector stability. They welcomed the important progress in reducing non-performing loans, increasing provisions and building capital buffers. Directors noted that weak profitability and sustained high sovereign yields pose challenges to the banking system. They encouraged further strengthening the banking system and also emphasized the importance of continuing to reduce costs and non-performing loans, and strengthening bank governance. They considered that the consolidation of cooperative banks into three new banking groups should be completed promptly while subjecting all three groups to asset quality reviews. Directors further stressed that swift recapitalization of weaker banks or timely and effective use of the resolution framework is essential to address outstanding weaknesses, and avoid excessive costs to the taxpayers and the rest of the banking system.



Italy: Selected Economic Indicators, 2017–23

(Annual percentage change, unless noted otherwise)

Projections

2017

2018

2019

2020

2021

2022

2023

Real GDP

1.6

1.0

0.6

0.9

0.7

0.6

0.6

  Real domestic demand

1.3

1.1

0.6

1.1

0.8

0.6

0.6

    Final domestic demand

1.7

1.0

0.7

1.0

0.8

0.6

0.6

    Private consumption

1.5

0.6

0.7

1.1

0.8

0.7

0.6

    Public consumption

-0.1

0.3

-0.1

0.9

0.6

0.5

0.5

    Gross fixed capital formation

4.3

3.2

1.4

1.0

0.6

0.6

0.7

    Stock building 1/

-0.3

0.1

0.0

0.0

0.0

0.0

0.0

  Net exports 1/

0.3

-0.1

0.0

-0.1

-0.1

0.0

0.0

    Exports of goods and services

5.7

2.4

1.8

1.7

1.5

1.4

1.3

    Imports of goods and services

5.2

3.1

2.0

2.1

2.0

1.6

1.3

  Savings 2/

20.4

20.7

20.7

20.6

20.4

20.4

20.3

  Investment 2/

17.6

18.3

18.2

18.3

18.5

18.7

18.9

Resource utilization

    Potential GDP

0.4

0.4

0.4

0.5

0.5

0.6

0.6

    Output gap (percent of potential)

-1.5

-0.9

-0.6

-0.2

-0.1

-0.1

-0.1

    Employment

1.2

1.2

0.6

0.7

0.6

0.5

0.4

    Unemployment rate (percent)

11.3

10.7

10.5

10.3

10.1

10.0

9.9

Prices

    GDP deflator

0.5

1.1

1.5

1.5

1.6

1.7

1.7

    Consumer prices

1.3

1.2

1.3

1.5

1.6

1.7

1.7

    Hourly compensation 3/

1.2

1.9

1.9

1.9

2.0

2.1

2.2

    Productivity 3/

2.1

0.3

0.2

0.5

0.3

0.4

0.4

    Unit labor costs 3/

-1.0

1.6

1.6

1.5

1.7

1.7

1.8

Fiscal indicators

    General government net lending/borrowing 2/

-2.4

-1.9

-2.1

-2.9

-3.0

-3.0

-3.0

    General government primary balance 2/ 4/

1.3

1.6

1.4

0.7

0.7

0.8

1.0

    Structural overall balance (percent of potential GDP)

-1.6

-1.5

-1.8

-2.8

-3.0

-3.0

-3.0

    Structural primary balance (percent of potential GDP) 4/

2.0

2.0

1.7

0.9

0.8

0.9

1.1

    General government gross debt 2/

131.2

131.4

130.9

130.7

130.9

131.0

131.1

Exchange rate regime

    Exchange rate (national currency per U.S. dollar)

0.9

0.8

…

…

…

…

…

External sector 2/

    Current account balance

2.8

2.4

2.5

2.2

1.9

1.7

1.4

    Trade balance

3.2

2.5

2.7

2.5

2.2

2.0

1.8

Sources: National Authorities; and IMF staff estimates.

1/ Contribution to growth.

2/ Percent of GDP.

3/ In industry (including construction).

4/ Primary revenue minus primary expenditure.

                                                                                   


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

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