Italy: Help Is Not On the Way

The dimming euro zone outlook turned even darker on the latest dismal news about Italy's economy. The zone's slowdown reinforces the idea that any monetary stimulus will be too late.

Italy's real gross domestic product in the third quarter grew 0.3% from the second quarter, or only 0.5% from a year ago. The fourth-quarter performance will probably look worse, given the recent monthly numbers. Industrial production fell 0.5% in September, and the employer trade group Confindustria says October output slipped another 0.3%, although factory orders in September rose 0.5%. Business sentiment dropped in October, while consumer confidence last month hit a five-year low.

Consumers are increasingly worried about job prospects. Although the third-quarter unemployment rate fell to 8.7%, recent layoff announcements, most notably by auto maker Fiat, weaken the job outlook. That could cause consumer spending to soften, leaving real GDP growth for the year up only 0.4%.

The Bank of Italy is far more optimistic for 2003. In its annual bulletin, released on Nov. 18, the BOI said the economy could grow 2% next year if the government finally moves forward with infrastructure projects.

That fiscal criterion, however, runs up against two problems. First, Prime Minister Silvio Berlusconi has concentrated on tax cuts rather than increasing spending to boost the economy. Second, Italy's fiscal debt situation remains one of the worst in the 12-nation euro zone. The federal deficit is expected to equal 2.4% of GDP this year, making it very unlikely that Italy will hit the European Commission's target of a balanced budget in 2004.

The recent slowdown in economic growth in the euro zone has raised expectations of an interest-rate cut by the European Central Bank, perhaps as early as its Dec. 5 meeting. But given the time lags between rate cuts and economic pickup, the ECB's action won't help the economies of Italy and other euro zone members until perhaps the second quarter of 2003.

By James C. Cooper & Kathleen Madigan

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