Italy: Growth Slows to a Stroll

Italy seems unlikely to hit its government's growth target for this year. And the shortfall could cause big fiscal problems later on.

In its revised figures for second-quarter gross domestic product, Italy's statistics bureau, ISTAT, left real GDP growth unchanged--at 0.2% from the first quarter. While exports did well, consumer spending slowed, and business investment fell. Worse still, the latest data suggest growth isn't picking up in the second half. Industrial orders are dropping, consumer confidence is close to a five-year low, and business sentiment in August held at a six-month low. Companies are cautious about future orders and production plans.

Since Italy's economy barely rose in the first half, growth will fall short of the government's target of 1.3% for all of 2002. Instead, real GDP will probably edge up by 0.5%. The weak outlook is the same across the rest of the euro zone. Even so, the European Central Bank kept interest rates on hold at its Sept. 12 meeting.

Despite slow economic growth, Italian inflation is creeping up. Consumer prices rose 2.4% in the year ended in August, up from 2.2% in June, and consumer groups have protested that the official index undercounts the price hikes faced by shoppers after Italian retailers switched over to the euro early this year.

Sluggish economic activity means that Rome will be hard-pressed to meet the European Union's directive that members of the euro zone have a balanced budget by 2004. The government's target now calls for a budget deficit of no more than 1.1% of GDP this year and falling away to zero by 2004. But a survey compiled by trade group Confindustria shows that private economists expect a ratio of 1.8% in 2002 and holding at 1.4% in 2003 and 2004.

Italy is not the only European country facing such fiscal binds. But it has historically had one of the most profligate governments, so reining in spending will prove difficult. And now, Rome cannot count on faster growth to generate the tax revenues needed to balance the books.

By James C. Cooper & Kathleen Madigan

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