Italy: Reports of a Recovery May Be Exaggerated

The Italian government has declared the recovery is under way. But the recent disastrous news from the industrial sector calls such optimism into question.

In mid-January, Prime Minister Silvio Berlusconi said the recovery had already begun. The government is forecasting real gross domestic product will grow by 2.3% for 2002, after an estimated advance of 1.8% for 2001. But the Organization for Economic Cooperation & Development projects only 1.2% growth, a lower figure echoed by private economists.

Certainly, the latest data are disappointing. Industrial output plunged by 2.6% in November, the biggest drop in nine years (chart). Capital-goods makers cut their production by a steep 3.7%, in part because foreign demand for machinery and parts has sagged because of the global slowdown. Businesses are more pessimistic about the outlook. In November, the index of business confidence slipped back to 83, a 51/2-year low.

Consumers, meanwhile, are not as gloomy. Confidence among Italian households was at a high 124 in November. Labor-market reforms are improving the job situation. The jobless rate reached a record low 9.2% in October. Plus, lower fuel costs are also increasing household buying power.

Even so, real consumer spending is on track to remain flat in the fourth quarter. And with business spending down, real GDP probably contracted by a 1% annual rate. First-quarter real GDP could also fall by that amount, since foreign demand is still weak.

Lower growth could mean that Berlusconi's government misses its budget deficit targets. Rome estimates that the deficit equaled 1.1% of GDP in 2001, and its goal is to have the budget in balance by 2003. To that end, it has extended a one-shot tax-amnesty plan. But the government still needs to reform the pension program in order to make any fundamental changes to Italy's fiscal problems. So far, the reforms have been minor--probably because officials know that attempts at pension reforms toppled the first Berlusconi Administration, in 1994.

By James C. Cooper & Kathleen Madigan

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