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Italy Country Risk Report Q2 2016

Italy Country Risk Report Q2 2016

Core Views Real GDP growth will come in at 1.0% in 2016, well below eurozone averages but the strongest outturn since 2010. European Central Bank monetary stimulus, an easing fiscal drag, cheaper oil prices and a weakening euro will be tailwinds for regional and domestic growth in the coming quarters. Domestic demand will drive growth in the coming years. This will ensure a steady narrowing of the current account surplus, which we forecast to have peaked in 2015. We view positively the urgent structural reform agenda of Prime Minister Matteo Renzi, and note that promising progress has been made so far. Internal divisions and falling popular support for the ruling party, as well as the potential for additional bank bail-ins to hit depositors and spur a government crisis, are the most prominent risk to the reform agenda at present. A failure to follow through on the structural reform agenda will imperil Italy’s long-term growth trajectory, and raises the risks that the public sector debt burden will become unsustainable. Even if reforms aimed at addressing Italy’s decline in productivity growth and external competitiveness are passed, an ageing demographic profile will make debt consolidation efforts over the long term exceedingly difficult. Major Forecast Changes No major forecast change.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Reforms Not Yet Having Desired Effect
Tight credit conditions and a weak labour market will continue to weigh on Italy's growth in 2016, despite the passage of reforms aimed
at addressing each issue. We are modestly below consensus in our real GDP growth forecasts of 1.0% and 1.2% in 2016 and 2017,
respectively.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy And Public Debt Outlook
Low Inflation Biggest Obstacle To Public Deleveraging
European Central Bank (ECB) action has been responsible for major improvements in Italy's debt sustainability by lowering
borrowing costs and interest repayment burdens. That said, additional ECB easing is having diminishing returns and rapid public debt
consolidation will remain out of reach given Italy's weak nominal GDP growth potential.
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
External Trade And Investment Outlook
Energy Savings Boost Current Account
Italy's current account surplus will begin narrowing in 2016 as domestic demand improves and the boost from lower oil prices runs
its course. Euro depreciation has been only a modest tailwind for the export sector, and weak external competitiveness will weigh on
growth of exports. Inward foreign direct investment remains in decline despite structural reforms aimed at improving the business
operating environment.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 GOODS EXPORTS IN 2014
TABLE: TOP 5 GOODS IMPORTS IN 2014
Chapter 2: 10-Year Forecast
The Italian Economy To 2025
Major Macroeconomic Challenge Ahead
We believe that the Italian economy will continue to face a very modest rate of growth over the longer term, weighed down by lower
credit availability, a weaker external environment, and waning global competitiveness. We also warn that major challenges, such as the
government debt load, a deteriorating demographic profile, structural decline in productivity and potential political instability, pose threats
to longer-term economic prosperity.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Economic Headwinds Raise Political Risks
Prime Minister Matteo Renzi appears safe for now, but mounting economic headwinds could undermine his government. There are
several plausible scenarios in which fresh elections are called before end-2016, and polls indicate that the anti-establishment 5-Star
Movement could beat Renzi's centre-left Democratic Party in a head-to-head matchup.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Fiscal Rebalancing To Weigh On Social Cohesion
Regardless of subsequent government's ideological leanings, Italian policymakers will be constrained by Italy's massive public debt load
and will be forced to enact unpopular measures over the next decade. This will limit the government's ability to tackle poverty and social
discontent, with the north-south socio-economic divide widening. We also expect Italy's regional and global standing to decline, and
finally, we see populist and xenophobic parties gaining momentum over the coming years.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: DEVELOPED STATES – LABOUR MARKET RISK
TABLE: DEVELOPED STATES – LOGISTICS RISK
TABLE: DEVELOPED STATES – CRIME AND SECURITY RISK
TABLE: DEVELOPED STATES – TRADE AND INVESTMENT RISK
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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