Global Insight's Italy Forecast

Paola sent me the Global Insight forecast for Italy which is worth the read.

The general story is already a reasonably well known one:

Italy’s economy continued to strengthen in the third quarter of 2006, although it was primarily due to a steep inventory build-up, according to a final estimate from the statistics bureau, ISTAT. Real GDP grew by 0.3% quarter-on-quarter (q/q) after having risen 0.6% (upwardly revised from 0.5% q/q) in the second quarter of the year. The economy performed as expected, and thus Global Insight still expects real GDP to grow by 1.7% in 2006, its strongest performance since 2001. The annual comparison was still solid, with real GDP rising by 1.7% year-on-year (y/y), unchanged from the second and first quarters of 2006.

They do however pick up the inventory issue:

The breakdown of GDP by expenditure revealed that solid consumer spending growth and a sharp rise in inventories were the major growth drivers in the third quarter, which offset a large drag from net exports. A marked rise in inventories boosted the overall q/q growth rate by 1.3 percentage points in the third quarter. We believe that the increase in stocks was not deliberate, and was probably the result of lower-than-expected export sales in the third quarter. This could imply a downwards correction in inventory levels in the final quarter of 2006 that would dampen overall economic growth to just 0.1% q/q from the reported 0.3% q/q in the third quarter.

In particular part of the inventory issue obviously exists in the automobile sector, where sales actually declined in the third quarter year on year (even if Fiat did increase its market share):

Retail sales were relatively subdued in the third quarter, while demand for new cars weakened. Indeed, the average level of new registrations contracted by 5.6% y/y in the third quarter, after having climbed 6.8% y/y in the second.

The rise of the euro has clearly been taking its toll:

Net exports weakened significantly, lowering the overall GDP quarterly growth rate by 1.0 percentage point in the third quarter, after making a welcome positive contribution in the first half of 2006. Exports of goods and services contracted 1.7% q/q (but were still up by 3.3% y/y) in the third quarter, after rising very healthily in the first half 2006. The decline in export sales was partly a technical correction after several quarters of strong growth and the result of the steady appreciation of the euro, which has strengthened from an average of US$1.20 in the first quarter to US$1.27 by end-September. A stronger euro hits the Italian export sector hard, making it more difficult to compete with low-cost producers in Eastern Europe and the Far East. Italy specialises in highly price-elastic goods, notably clothing and footwear, as well as capital equipment. In the first half 2006, Italian export sales had been lifted by the relatively healthy global growth and stronger demand across the Eurozone, coupled with the markedly softer euro in the second half of 2005 and the first quarter of 2006. Meanwhile, growth in imports of goods and services strengthened from 0.2% q/q and 3.2% y/y in the second quarter, to 2.1% q/q and 5.4% y/y in the third quarter, reflecting firmer consumer spending.

Strangely there is relatively little discussion in the forecast of the budget deficit situation and the ongoing fiscal tightening that will be required. Juts this bried comment:

The fallout from the 2007 budget process is expected to have a negative impact on both growth and already fragile consumer confidence. The higher tax burden for top income earners and the unpopularity of the 2007 budget will continue to hurt consumer confidence well into 2007. It is likely that some cautious consumers could choose to save rather than spend the additional disposable income as they expect the economy to stumble again, while believing that additional fiscal tightening measures are inevitable.

In contrast the economists over at Global Insight have clearly bought the rise-and- rise euro story, and see this having a much more considerable impact on Italian growth than the fiscal restraint:

Real GDP growth is expected to fall back to 1.3% again in 2007, before accelerating gently to 1.4% in 2008. The slowdown will reflect the prospect of the euro making substantial gains against the U.S. dollar in the vicinity of US$1.40 by the end of 2007 and US$1.48 by end-2008. Consequently, export growth is projected to fall sharply in 2007 and remain subdued in 2008.

Really I think these numbers are way too high, and as we can see the euro is already starting to fall back from the recent highs. Obviously over at Global Insight they would do well to read Claus Vistesen a bit more often. And those who are already reading Claus regularly, might enjoy this post from James Hamilton, who is in many ways saying something similar.