Bloomberg reports that the Italian government has trimmed by more than half its forecast for growth in what is Europe's fourth-biggest economy this year, thus joining other EU nations in limiting expectations for an early recovery. The Italian Ministry of Finance said in its quarterly bulletin that it expects the economy to expand 1.1 percent in 2003, less than last September's prediction of 2.3 percent. Much of the slowdown is due to growth problems in a European market which is hurting Italian exports. The projection of the Italian government matches that of the International Monetary Fund, which lowered on April 9 its forecast for the euro region for the second time this year. Europe's three biggest economies, Germany, France and the U.K., had already reduced their growth forecasts for 2003.

Optimism among Italian consumers fell for the third time in four months on concern the U.S. war on Iraq may aggravate an economic slowdown in Europe's fourth-biggest economy and fuel unemployment. The state-funded Isae institute's index of household confidence, one of the first monthly gauges of European consumer optimism, dropped to 106.8 from 107.7 in February, leaving the measure near January's six-year low of 106.2. ``My fear is that even if the war comes to a brief end we're in for a decade of terrorist fear not knowing where the next threat is coming from,'' said Maurizio Piglione, chief executive of Saiag SpA, a maker of household goods such as freezer bags, ironing board covers and aluminum foil.

The start of the war may exacerbate the drop in consumer spending that contributed to Italy's $1.3 trillion economy growing at its slowest rate in almost a decade last year. Production may be disrupted in coming months as Italy's union mobilize workers for further protests against the conflict. Any rebound will also be delayed by slowing growth in Italy's biggest trading partners, France and Germany. Italy's three-biggest unions called for a national, two-hour work stoppage today to be followed by protests across the country. More than 1.5 million Italians demonstrated against the war in Rome on Feb. 15, the biggest of the protests held that day around the world.

``If things were bad before they've just got a whole lot worse,'' said Antonia Gozzi, 34, a music composer who took part in the anti-war protests in Rome last month. ``A spending spree is the last thing on my mind.'' Consumers have been cutting back across Europe. Retail sales in the U.K. unexpectedly fell in February for a second month, the government said today. Optimism among consumers in Belgium, the only other EU country to already report on confidence, fell in March to a six-year low. Optimism in the 12-nations sharing the euro fell to the lowest in more than six years in February.

The European Commission Monday cut by almost half its prediction for 2003 growth to 1 percent for the dozen nation sharing the euro. The U.S.-led war on Iraq may further curtail growth in the $7 trillion economy, the commission said. ``Everything has come to a halt, complete stagnation,'' said Massimo Turconi, chief executive officer at Ratti SpA, an Italian maker of luxury silk scarves founded in 1945, at the end of the Second World War. ``I don't see a pickup in sight until the second half of 2004.'' Germany barely averted a recession in the fourth quarter as gross domestic product stayed unchanged. French consumer confidence slumped to a five-year low. Italy and its two-largest trading partners make up about 70 percent of the gross domestic product of the nations sharing the euro. The yield on Italy's benchmark 4 3/4 percent 10-year bond maturing in 2013 fell 4 basis points to 4.36 percent. A basis point is 0.01 percentage point. Americans share the European gloom. U.S. consumer confidence tumbled this month to the lowest in more than a decade, a survey by the University of Michigan showed on Friday. Italian consumers are also concerned that the slowing growth will lead more companies to cut jobs, boosting unemployment for the first time in five years. The country's 8.9 percent jobless rate is the third highest among the Group of Seven industrialized nations.

Fiat SpA and Pirelli SpA, two of Italy's biggest manufacturers, have already announced they will axe about 10,000 jobs. This month a spate of Italian insurers, banks and retailers have reported falling sales and some are resorting to firings to curb costs. Assicurazioni Generali SpA, Europe's fourth-largest insurer, posted its first full-year loss since the 1970s and is cutting 2,800 jobs. Ducati Motor Holding SpA, the Italian maker of Testastretta motorcycles, said net income tumbled 39 percent. Gucci Group NV Chief Executive Officer Domenico De Sole said fears of war are damaging luxury goods sales. Isae's survey of 2,000 consumers showed that the percentage of Italians who think unemployment will increase rose to 42 percent from 40 percent last month. ``Consumers have been in a crisis for a long time,'' said Marco Venturi, president of Italy's second-largest retailers' group, Confesercenti, which represents 240,000 retailers, hotels and tour operators. ``The government needs to intervene urgently to stimulate consumption and growth.'' Italian confidence has also been hurt by rising consumer prices, which have remained above the ECB's 2 percent ceiling even as economic growth slowed. Consumer prices in March probably rose 0.2 percent to leave the inflation rate at 2.6 percent the same as the EU-harmonized rate for Italy the previous month, a survey of 12 of Italy's largest cities is expected to show today, economists said.
Source: Bloomberg
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Italy Implements It's Own Tax Cut

The Italian government just implemented its own version of the tax cut. It is difficult to see the logic behind this when Italian growth is faltering (only 0.4% growth last year, and most probably negative growth this one).

Italy's parliament Wednesday gave final approval to a wide-ranging tax cut plan through which the centre-right government hopes to give the economy a boost before its term expires in 2006. Prime Minister Silvio Berlusconi's government has already started to implement some tax cuts with its 2003 budget, which has raised concerns at the European Union that Italy will run a higher-than-expected deficit. The 2003 budget focused on cuts to low-income families that will cost the state around EUR5.5 billion. The corporate tax rate was trimmed to 34% from 36%, costing the state some EUR2.0 billion. With the reform approved Wednesday, the government aims to cut and simplify the income tax regime to include just two brackets by 2006 - at 23% for families earning up to EUR100,000 and 33% for those on a higher income. Currently, the income tax brackets are set at 23% on income below EUR15,000; 29% on income between EUR15,000 and EUR29,000; 31% between EUR29,000 and EUR33,000; 39% between EUR33,000 and EUR70,000; and 45% above EUR70,000. The corporate tax rate will be trimmed another percentage point to 33% by 2006. The government has said the speed of the tax cuts will depend on how the economy is performing. Growth in Italy, the euro-zone's third-largest economy behind Germany and France, is stagnant. Gross domestic product expanded a meager 0.4% in 2002, the slowest for nearly a decade. Through its 2003 budget, which relies heavily on one-off measures such as tax amnesties to raise money, the government is hoping to cut the deficit to 1.5% of GDP from 2.3% last year.
Source: Yahoo News
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Such cuts are very perplexing when the long term budgetary outlook in Italy looks so preoccupying. The parlous state of Italian finances has been highlighted several times by the European Commission, who also continuously complain about the poor quality of the information received from the Italian government. Italy has, in fact, one of the highest debt/GDP ratios outside Japan (over 100%) and one of the most complicated demographic panoramas in the developed world. For the last two years they have only avoided exceeding the 3% stability pact limit through the use of one-off measures (including the securitisation of public buildings). In a recent study of economic vulnerability to ageing Italy came in eleventh out of the twelve countries studied (the last place being awarded to Spain, which was described as 'Italy without the reforms'). With large reductions in benefits now built in, and little accumulated private wealth available as a fall-back position for large parts of the population, an important section of Italian society surely faces mid-term impoverishment. The absence of extensive public care for the aged, and the strength of family ties, mean that most of the burden will fall on the long-suffering Italian houswife, thus making an increase in female participation rates virtually a non-starter. This is going to be the symmetrical equivalent of getting young mothers out to work when there were no creche or child care facilities available. And in the midst of all this it's hard to see Italy boosting the Total Factor Productivity element by motivating a dynamic intellectual-capital growth push based on the few young people Italian society will have at its disposal. With the problem in such an advanced state maybe there is now not a lot that can be done, but living in the clouds is surely not one of the more recomendable therapies.

By 2040, Italy will have one elder for every working-age adult—putting it in a dead heat with Japan and Spain for the developed world’s worst demographics. On top of that, Italy’s pension spending as a share GDP is the highest in the Index countries, and the Italian elderly are among the least likely to be employed or to receive a private pension. Moreover, Italy’s overall eleventh-place ranking in the Index comes despite a series of pension reforms enacted in the 1990s (the “Amato” and “Dini” reforms) that are scheduled to make steep cuts in future benefits. Without these reforms, Italy would surely be in last place. The open question is whether Italy is likely to make good on its reform promises. Its second place ranking in the benefitdependence category (with family ties second only to Japan) gives some hope. Yet Italy comes in last in the elder-affluence category, a reflection of how seriously these future benefit cuts threaten elder living standards.
Source: Global Ageing Initiative Vulnerability Index
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Bank of Italy Gives Gloomy Forecast

Oh, oh. Looks like reality-check time for the Italian economy is getting near.

Economic growth in Italy this year is likely to fall well short of the government's official target of 2.3 per cent, even if the world economy is not disrupted by a long war in Iraq, Italy's central bank said on Monday. In its regular six-monthly economic report, the Bank of Italy said gross domestic product growth was unlikely to exceed 1.3 per cent and could be lower if a war lasted for a long time. GDP growth in 2002 was 0.4 per cent, its lowest level since 1993. Private sector economists described the Bank of Italy's assessment as broadly in line with their own, but noted that some forecasters are predicting GDP growth of less than 1 per cent this year. Economists at Barclays Capital in London expect growth of only 0.6 per cent. Italy's centre-right government has been criticised by the European Commission for publishing macroeconomic forecasts that in the Commission's view are based on over-optimistic assumptions about GDP growth.

In an updated stability programme sent to the Commission last year, the government forecast growth of 2.3 per cent this year, 2.9 per cent in 2004 and 3.0 per cent in both 2005 and 2006. Using these estimates, the government says Italy's budget deficit will fall from 2.3 per cent of GDP last year to 1.5 per cent this year, 0.6 per cent in 2004 and 0.2 per cent in 2005. The government is predicting a budget surplus of 0.1 per cent in 2006. The government is also forecasting a fall in Italy's public debt from 106.7 per cent of GDP last year to 96.4 per cent in 2006. However, the Commission said recently that the government's projections "do not appear to be in line with the degree of caution that should underpin a prudent fiscal strategy". Some private sector economists say Italy's budget deficit, far from going down this year, is at risk of exceeding the limit of 3 per cent of GDP set out under the European Union's stability and growth pact. They say Italy's public finances remain a cause for concern because the government's 2003 budget relies on one-off savings and revenue-raising measures rather than long-term structural reforms to keep down the deficit and public debt.
Source: Financial Times
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Fiat's Death Agony Drags On

The death of Giovanni Agnelli on Friday, a day on which, in one of those strange coincidences of history, the future of his Fiat group was to have been 'finally resolved'', now propels his younger brother Umberto onto centre stage in the Fiat drama, with a dénouement to be expected within weeks. Umberto, who is 68, had assumed the family mantle in recent months while Fiat's honorary chairman battled cancer. Now it is he who must make far-reaching decisions for the Agnelli clan without any possibility of consulting the brother who had eclipsed him for so long. This strange, and macabre, twist in the Fiat crisis seems to be telling us something about the state of the world in Italy. For those who know how to look that is:

Fiat's board is expected to be convened within two weeks to review a recapitalisation and refinancing plan that could loosen the family's hold on the carmaking and industrial group.On February 28, Fiat's board could endorse a finalised plan, in addition to approving 2002 results that will include a €1.35bn ($1.46bn) operating loss for Fiat Auto and a slight drop in group revenues to €55bn. By then, however, Fiat might be a very different company if its creditor banks impose a new financial plan.The plan must accomplish several tasks deemed of national importance. For starters, it must stave off bankruptcy for Fiat Auto, the company's deeply troubled automobile division. The plan must also seek to avoid a sale of the division to General Motors, reversing Fiat's previous intentions to sell Fiat Auto to GM at the start of 2004 thanks to the exercise of a put option.

The plan, being worked out by Fiat's four largest creditor banks - Banca Intesa, Capitalia, Sanpaolo IMI and UniCredito Italiano - also must take into account government wishes that Fiat Auto should not fall into the hands of GM. Such a finale, the government fears, would be a national embarrassment and endanger the jobs of Fiat workers and of the hundreds of thousands of workers at Fiat's suppliers.In addition, the plan must take into account the ability of the Agnelli family itself to partake in a refinancing of the group. Currently, the plan involves the sale of several Fiat assets that would raise €3bn to be ploughed back into Fiat Auto. Another €2bn to €3bn would be raised on the markets. Fiat Auto could be spun off.In anticipation of such a plan, the Agnelli family's trust, Giovanni Agnelli & C, on Friday said family members agreed to a €250m capital increase, the first step the family must take if it is to remain a key shareholder of the company Umberto's grandfather founded in 1899. The trust also could raise cash from selling parts of Exor, an investment company it controls and which owns Chateau Margaux, the famed winery, and a significant stake in Club Mediterranée. Cash from the trust could then be used to partake in capital increases at IFI and Ifil, the two Agnelli- controlled holding companies that in turn own a combined 30 per cent of Fiat.Fiat's various subsidiaries in turn own another 4 per cent of Fiat group stock, giving the Agnellis effective control of 34 per cent of the company.
Source: Financial Times
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