S&P Sees 0.9% Growth in Italy

S&P Global Ratings affirmed the unsolicited ‘BBB-’ long-term and ‘A-3’ short-term sovereign credit ratings on the Republic of Italy. The outlook is stable.

The affirmation, the rating agency said, “reflects our forecast that Italy’s economy will grow by about 0.9% in 2017 as domestic demand stabilizes amid the gradual improvement in the labor market. We expect, however, that employment growth will slow down given the phasing out of hiring-related tax credits. We forecast the average unemployment rate will be about 11.3% this year, down from 11.7% in 2016, before falling further to 11.0% in 2018,” ItalyEurope24 reported.

At the same time, S&P added, “private consumption will likely be dampened by rising inflation, partly caused by higher oil prices. We anticipate that monetary policy will remain accommodative. In our view, the negative impact on purchasing power resulting from an increase in inflation will be partly offset by the government’s fiscal policy measures, which include ending the public-sector wage freeze that has been in place since 2010; measures to support families and low-income pensioners; and providing more flexible access to the social security system.”

In 2016, S&P continued, the Italian economy grew by 0.9% in real terms. “It appears that the political and financial uncertainty related to the failed constitutional referendum and adverse developments concerning the Monte dei Paschi di Siena bank have not had any significant negative impact on Italy’s economic recovery.”

“Investment activity has also been recovering, especially in non-construction sectors and we expect it to continue to support economic growth this year. In our view, favorable financial conditions will remain in place, coupled with the government’s extension of the so-called ‘super amortization’ (namely the introduction of ‘hyper amortization’ for innovative industries, alongside tax credits for research and development, innovative industries, and small and midsize enterprises) and corporate income tax cut to 24% from 27.5% previously. As a result, rising profitability of firms is increasing their capacity to invest. We expect public investment to grow in line with nominal GDP over 2018-2020.”

“The stable outlook reflects our expectation that the Italian government will continue to adopt structural reform measures such as a new competition law, and will continue to improve the effectiveness of the judiciary and public administration, while at the same time maintaining a stable level of government debt to GDP,” they said.

Italy’s general government debt pile would remain “broadly stable” at roughly 131% of the country’s GDP, S&P said, before declining towards the end of the agency’s 2018 to 2020 forecast period.