ISAE Forecast 2007

Well, since Paris suggests I never post any good news about Italy I would like to draw attention to the fact that Italy's National Institute for the Study and Analysis on the Economy (ISAE) has just published it's 2006/2007 forecast for the Italian Economy (careful PDF). This follows the quadro mocroeconomico 2007-2009 published on 11 October (again PDF, thanks Vittorio). The basic picture is summarised as follows:

Italy GDP to slow down in 2007, partly due to austerity measures - ISAE

Italy's GDP growth is expected to slow down in 2007 from 2006, due to government austerity measures to limit the public deficit and general economic weakness in the euro-zone, according to research institute ISAE. ISAE forecast GDP growth to be 1.8 pct this year, adjusted to the number of working days, falling to 1.3 pct in 2007. Gross GDP growth is seen at 1.7 pct in 2006 and 1.4 pct in 2007, it said. The research institute expects the public deficit to be 4.6 pct of GDP this year and 2.7 pct the next, beating the government's forecast of a 4.8 pct deficit in 2006 and a 2.8 pct deficit in 2007. ISAE forecast inflation dropping from 2.2 pct this year to 2.0 pct in 2007, thanks to declining oil prices.

A number of things are worth noting. In the first place the expectation that the Italian economy will slow somewhat next year, from an estimated growth rate of 1.7/1.8% in 2006 to one of 1.3/1.4% in 2007. The reasons given for the slowdown are the impact of the fiscal correction in Italy, and in the Eurozone (which is envisioned as slowing from 2006s projected 2.7% to 2% in 2007) and a slowdown in the US (which is expected to slow from 3.3% this year to 2.3% next year).

My feeling is that these numbers may be rather on the high side for the entire eurozone, but not extravagantly so. A lot of course depends on how this growth is distributed across the year, or put another way, on how quickly the German economy slows.

On the bigger story I still feel that these kind of projections (which are pretty typical of what is on offer at present) may well be reading things back to front. Both the German and Japanese economies are now slowing significantly, but what will decide whether there is a recession in these countries in 2007 really rather depends on what happens in developing countries like India and China. If these sustain momentum, then export demand may well serve to keep Germany and Japan afloat. (All this is argued in much greater depth in the Indian context in this post, and this one, and especially the comments).

On the deficit the ISAE forecast is for a defict in 2006 of 4.6% of GDP (which reduces to 3.4% of GDP if the recent VAT decision is allowable), and for 2007 the deficit is expected to fall to 2.7% of GDP, depending, of course, on the final details of the budget.

In conclusion I would just highligh a few points from the report:

"L’accelerazione delle vendite all’estero ha beneficiato dell’irrobustimento della congiuntura europea, in particolare tedesca; si sono intensificate, nella prima parte del 2006, anche le esportazioni verso la Cina, soprattutto di beni della meccanica strumentale."

So what we see here is the pattern in Germany and Japan being repeated to some extent, with Italy being pulled in the China-German train, with, of course, machinery and equipment to China playing a significant part in the story. Now Germany, as we know, is about to slow, but what about China, this is the big unknown. My guess is that the Chinese show will run through to the Olympics in 2008, but it is just that, a guess. There is no sign of any big slowdown there at this point.

"Alla maggiore vivacità del ciclo economico si è accompagnato, nei primi sei mesi di quest’anno, un significativo miglioramento delle condizioni del mercato del lavoro, in termini sia del numero di individui che dichiarano di avere un impiego nella rilevazione trimestrale ISTAT sulle forze di lavoro"

The picture in Italy is quite similar to that in Japan, there is a significant labour market tightening, but this is not necessarily due to the rate of economic growth so much as the fact that the labour force is ageing and potentially reducing. Germany is the odd one out here, since despite having the conditions to experience labour market tightening, the tax wedge and the relatively generous benefits levels make it difficult to make a dent in the level of unemployment.