Five economic challenges for Italy’s next prime minister

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http://maltawinds.com/2018/02/06/five-economic-challenges-italys-next-prime-minister/

While conditions in the economy are improving it still lags behind its peers in most measures

Italy’s economy is in much better shape than before the last general election in 2013. Back then, the country’s gross domestic product was 10 per cent smaller than in 2008, nearly 1m jobs had been lost and banks were accumulating bad debts. Now GDP has been expanding for three years, unemployment is declining and banks are healthier. Yet the country is still a laggard among its peers and economic discontent has not disappeared. Here the Financial Times considers the main economic challenges the next prime minister will face.

  1. Slow economic growth and low productivity

Italy was on “on the right track”, Paolo Gentiloni, the country’s prime minister, said at the World Economic Forum in Davos in January. Output is now 4 per cent larger than in 2013 and economists keep revising up their growth forecasts for this year.

Yet Italy’s economic growth remains among the slowest in Europe. The country is also among the few economies within the Organisation for Economic Co-operation and Development where output is not yet back to pre-crisis levels. The gap with 2007 levels is the second-largest after Greece.

A related problem is that Italy shows the weakest productivity performance among G7 countries. Sluggish productivity growth means Italian businesses need increasingly more people to produce the same value of output as in other major economies.

  1. High public debt

High public debt is one of “Italy’s most pressing problems”, says Nicola Nobile at Oxford Economics. Italy’s debt is the third largest among 34 OECD countries after Japan and Greece, and a hot topic in the country’s relationship with the EU.  Public debt went up 33 percentage points to 132 per cent of GDP since 2007, largely as a result of falling government revenues and shrinking real GDP.

The trend is finally reversing “thanks to prudent fiscal policy, lower interest rates and rising GDP growth”, says Mauro Pisu, head of the OECD’s Italy desk. But the high level of public debt makes any rapid increase in interest rates “a major risk for public debt dynamics” and leaves little room for tax cuts or increases in spending, as proposed in most parties’ manifestos.

  1. Poor job opportunities for young people

The economy has managed to create more than 1m jobs since September 2013 but unemployment rates remain well above pre-crisis levels.

One in three people in the labour force and aged under 25 is unemployed and Italy has the largest proportion of youth not in employment or training among OECD countries. What is more, Italy shows the second-lowest employment rates of recent graduates among EU countries after Greece. Economic frustration among the youth is the main reason for Italy’s brain drain.

  1. High levels of banks’ debt

The banking sector “is more stable than two to three years ago”, says Mr Pisu. Economic improvements, pressure from regulators and investor-friendly reforms have led to a reduction in banks’ bad debts. The last year “has been a watershed in terms of the health of Italian banks”, says Marco Troiano at Scope Ratings. The recapitalisation of the main troubled banks has “resulted in a much-improved sector-wide asset quality picture”, he adds.

But Italian banks still make up the EU’s largest slice of non-performing loans, which curtail banks’ ability to lend. “The challenge for 2018 lies in the continued reduction of the stock of bad loans, and with execution of some more capital increases, especially for the weaker players,” says Mr Troiano.

  1. Low levels of foreign direct investment

In the last few years Italy “has made considerable progress” towards a more business-friendly environment, says Lorenzo Codogno at LC Macro Advisors. In 2006, Italy ranked only 156th in the World Bank ease of doing business global survey — 110 positions below where it is now. The country is now closer to the best performing in most of the ranking’s measures, including ease of starting a business.

Italy “has significantly increased its attractiveness as an investment destination among the mature economies”, says Donato Iacovone at EY. Yet, the country still lags behind most of its peers. The value of greenfield FDI projects in Italy in the last 10 years is half of France’s.

Policies “will need to be maintained for a long time”, said Mr Pisu. “Foreign investors prefer stability.”

The Financial Times