Renzi Bets Italy's Plan Will Overcome Europe Growth Doubts

Updated on
  • Higher growth forecast more optimistic than many economists'
  • Premier signals China weakness won't damp outlook for Italy

Prime Minister Matteo Renzi is gambling his plan for post-recession Italy will overcome economists’ and investors’ doubts about the outlook for European growth following the emerging-market slowdown. 

Cheaper oil, a devalued currency and the European Central Bank’s asset purchases pushed Italy out of a record-long slump. The draft budget plan that Renzi will present after a cabinet meeting in Rome on Friday includes upward growth revisions for both this year and 2016.

Italy’s current recovery “has a cyclical element, it has an element driven by external factors,” Finance Minister Pier Carlo Padoan told a conference in Milan on Tuesday. “But the recovery also has structural elements which will make the economy stronger and put it in a better place to resist the changes in the global environment, when the global economy gets less favorable than it is today."

Labor Reform

Gross domestic product is seen expanding 0.9 percent in 2015, up from 0.7 percent projected by the government in April, and then in 2016 more than the 1.3 percent previously forecast, Renzi said earlier this week. He added that the euro region’s third-biggest economy is benefiting not only from better external conditions, but also from the effects of the reforms passed by his government, starting with the overhaul of Italy’s labor code.

Italy’s new GDP-growth estimates compare with less optimistic projections released on Wednesday by the Paris-based Organisation for Economic Cooperation and Development. In its interim forecasts for the global economy the OECD said the Italian economy will expand 0.7 percent in 2015 and 1.3 percent in 2016.

Italy’s government bonds jumped on Friday along other European bonds after the U.S. Federal Reserve cited global uncertainty in keeping its benchmark interest rate at a record low, fueling speculation that the ECB could step up its stimulus measures. The yield on Italy’s 10-year fell to as low as 1.75 percent, the lowest in a month.

Italy is making reforms that are having a positive impact on growth, employment and investments, European Union economy commissioner Pierre Moscovici said in an interview published Friday in Corriere della Sera.

“There is still a lot to do but the situation is encouraging,” said Moscovici, who is scheduled to meet with Padoan in Rome in the afternoon.

Elsewhere in Europe, where most of the main economies are seen by the OECD expanding this year at a faster pace than Italy’s, investors are increasingly worried about prospects for growth in coming months.

China Developments

In Germany, the region’s economic powerhouse and top export destination for Italy’s goods and services, investor confidence fell for a sixth month in September as developments in China and other emerging are seen damping the economic outlook.

“Clearly if the international backdrop were to deteriorate significantly, the government’s projections would obviously be too optimistic," said economist Giada Giani at Citigroup Inc. in London. Part of Renzi’s confidence in Italian growth next year “could be due to a positive carryover effect from the end of 2015 and part of it could be attributed to the envisaged expansionary fiscal policy to be included in the budget,” she said.

Italy will ask the European Union for permission to scale back next year’s deficit-reduction goal, Padoan told parliament on Wednesday.

The new shortfall target will be above the 1.8 percent of GDP set in April, Padoan indicated. That will help the government fund measures including expected tax cuts of 35 billion euros ($39.6 billion) over three years aimed at boosting the economy.

“It seems unlikely that the government will win much fiscal room for maneuver in its discussions with the EC and it may have to focus on lower public spending and continuing with the reform agenda,” Nicola Nobile, an economist at Oxford Economics, said in a research note on Friday, referring to the European Commission.

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