ECONOMIC FORECAST FOR ITALY 2002-2003: JUNE

UNCLAS SECTION 01 OF 10 ROME 002958 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, JONES UNCLASSIFIED PAGE 02 ROME 02958 01 OF 10 181526Z STATE PASS CEA STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 4212/ITA/MAC/OEURA/CPD/DDEFALCO E.O. 12958: N/A TAGS: ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP SUBJECT: ECONOMIC FORECAST FOR ITALY 2002-2003: JUNE 2002 PREDICTIONS REF: (A) ROME 02794, (B) 02 TREAS 101720Z, (C) 02 ROME 462 ¶1. SUMMARY. THE ITALIAN ECONOMY IS LIKELY TO REMAIN SOMEWHAT WEAK OVER THE FORECAST PERIOD. GDP GROWTH IS EXPECTED TO BE AN ANEMIC 1.3 PERCENT IN 2002. THE GLOBAL ECONOMIC UNCERTAINTY CONTINUES TO DAMPEN ITALIAN EXPORTS, AND HEIGHTEN CONSUMER UNCERTAINTY. THE CONVERSION TO THE EURO HAS PUSHED UP INFLATION TO 2.4 PERCENT. THE GOVERNMENT HAS YET TO RESOLVE THE PROBLEM OF A SPIRALING PUBLIC DEFICIT. OPPOSITION FROM TRADE UNIONS, WHICH HAVE PLAYED A KEY ROLE IN SOCIAL AND ECONOMIC POLICY-MAKING, HAS STALLED PROGRESS ON KEY LABOR AND ECONOMIC REFORMS. THE GOVERNMENT NEEDS TO IMPLEMENT THE RIGHT MIX OF FISCAL POLICIES AND BEGIN TO ENACT SIGNIFICANT REFORMS FOR ECONOMIC RECOVERY TO BE STRONG. END SUMMARY. GDP GROWTH: 2002 -------------- UNCLASSIFIED PAGE 03 ROME 02958 01 OF 10 181526Z ¶2. GDP GROWTH IN ITALY CONTINUES TO DECELERATE. THE GLOBAL ECONOMIC SLOWDOWN IS HURTING ITALIAN EXPORTS TO ITS MAJOR MARKETS: THE U.S. AND GERMANY. CONCERN ABOUT GLOBAL ECONOMIC CONDITIONS AND SIGNS OF INCREASED INFLATION HAVE DEPRESSED CONSUMER DEMAND. EVEN THE ANEMIC GDP GROWTH IN 2001 OF 1.8 PERCENT MAY SURPASS GROWTH IN 2002. THE MOST PESSIMISTIC FORECAST IS A GROWTH RATE OF 1.3 PERCENT. THE GOVERNMENT MAINTAINS THAT GROWTH WILL BE AROUND 2.3 PERCENT, BUT HAS CONCEDED THAT IT COULD BE AS LOW AS 1.3 PERCENT. ¶3. THE LATEST DATA ON INDUSTRIAL PRODUCTION ARE DISAPPOINTING. ON A YEARTO-YEAR BASIS, INDUSTRIAL PRODUCTION CONTINUES TO REGISTER A DECLINE. IN THE FIRST FOUR MONTHS OF 2002, INDUSTRIAL PRODUCTION WAS DOWN 3.5 PERCENT OVER THE CORRESPONDING PERIOD OF PREVIOUS YEAR. APRIL HOLIDAYS AND THE GENERAL STRIKES HAD A NEGATIVE EFFECT ON INDUSTRIAL PRODUCTION THAT POSTED AN ANEMIC 0.5 PERCENT INCREASE IN APRIL. A MODEST RECOVERY IS EXPECTED IN MAY. (NOTE: 17 MILLION HOURS HAVE BEEN LOST TO STRIKES THROUGH APRIL 2002, UP 1,317.4 PERCENT OVER THE CORRESPONDING PERIOD OF 2001.) EVEN WITH BETTER RESULTS IN MAY, INDUSTRIAL PRODUCTION THROUGH THE FIRST FIVE MONTHS OF 2002 STILL WOULD BE ONE TO TWO PERCENT BELOW THE CORRESPONDING PERIOD IN 2001. ¶4. ON THE DEMAND SIDE, CONSUMER CONFIDENCE IS FALLING, AFTER RISING IN THE FIRST THREE MONTHS OF 2002, TO LEVELS SIMILAR TO THOSE IMMEDIATELY FOLLOWING UNCLASSIFIED PAGE 04 ROME 02958 01 OF 10 181526Z SEPTEMBER 11. A SIGN OF THE TIMES: CAR SALES DROPPED BY 11 PERCENT FROM APRIL TO MAY AND BY 12.7 PERCENT FROM JANUARY TO MAY OVER 2001 SALES. CONSUMERS ARE INCREASINGLY CONCERNED ABOUT THE ECONOMIC SITUATION IN GENERAL AND ABOUT INCREASED INFLATION IN PARTICULAR. ¶5. THESE TRENDS, IF THEY CONTINUE, WOULD DECELERATE GDP GROWTH FROM THE 1.8 PERCENT REGISTERED IN 2001 TO 1.3 PERCENT IN 2002. THIS IS FAIRLY IN LINE WITH THE AVERAGE GROWTH RATE IN THE EURO AREA, BUT HIGHER THAN GERMANY. ACCORDING TO THE CONSENSUS FORECAST OF ITALIAN RESEARCH INSTITUTIONS, EVEN IF GDP GROWTH ACCELERATED IN THE LAST QUARTER OF 2002, GDP GROWTH WILL NOT MAKE UP GROUND LOST IN 2001. THE CONSENSUS FORECAST, WHICH WE SHARE, IS THAT GDP GROWTH IN 2002 WILL BE 1.3 PERCENT. ¶6. TWO OTHER COMPONENTS OF DOMESTIC DEMAND, PRIVATE CONSUMPTION AND INVESTMENT, WILL SUPPORT WHATEVER GDP GROWTH OCCURS. PRIVATE CONSUMPTION IS EXPECTED TO ACCELERATE SLIGHTLY FROM 1.1 PERCENT IN 2001 TO 1.3 PERCENT IN 2002, WHILE INVESTMENT IS EXPECTED TO UNCLASSIFIED UNCLASSIFIED PTQ0868 PAGE 01 ROME 02958 02 OF 10 181526Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 EAP-00 EUR-00 EXIM-01 E-00 UTED-00 FOE-00 VC-00 FRB-00 IPS-01 H-01 TEDE-00 INR-00 ITC-01 AC-01 NSAE-00 OMB-01 OPIC-01 ACE-00 SP-00 SSO-00 STR-00 TEST-00 TRSE-00 USIE-00 FMP-00 G-00 SAS-00 /008W -------------- BEF322 181526Z /07 P 181132Z JUN 02 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 4273 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 2707 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 02 OF 10 ROME 002958 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, JONES UNCLASSIFIED PAGE 02 ROME 02958 02 OF 10 181526Z STATE PASS CEA STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 4212/ITA/MAC/OEURA/CPD/DDEFALCO E.O. 12958: N/A TAGS: ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP SUBJECT: ECONOMIC FORECAST FOR ITALY 2002-2003: JUNE 2002 PREDICTIONS ACCELERATE FROM 2.4 PERCENT IN 2001 TO 2.5 PERCENT THIS YEAR. HOUSEHOLD CONSUMPTION IS EXPECTED TO INCREASE SLIGHTLY AS A RESULT OF THE MINOR INCREASE IN WAGES. THESE INCREASED WAGES ARE, HOWEVER, PARTLY OFFSET BY LOSS IN INCOME FROM STOCKS. (NOTE: STOCK INDICES DROPPED 25.1 PERCENT IN 2001). CONSUMPTION WILL ALSO BE TEMPERED BY INCREASED INFLATION, WHICH IS A RESULT OF HIGHER OIL PRICES, AND THE IMPACT OF THE ECONOMIC CRISIS IN ARGENTINA. (NOTE: THE LEADING CONSUMER ASSOCIATIONS ESTIMATE THAT 450,000 PRIVATE ITALIAN INVESTORS HOLD ARGENTINE ASSETS.) ¶7. PUBLIC CONSUMPTION IS EXPECTED TO DECLINE IN 2002. THE CENTRAL GOVERNMENT HAS IMPOSED EU-MANDATED BUDGET TARGETS ON REGIONAL AND LOCAL GOVERNMENTS. THEIR PUBLIC CONSUMPTION, AS A SHARE OF GDP, IS EXPECTED TO DECLINE FROM 17.6 PERCENT IN 2001 TO 17.4 PERCENT IN ¶2002. OUR FORECAST UNCLASSIFIED PAGE 03 ROME 02958 02 OF 10 181526Z GDP COMPONENT AS PCT OF GDP2001 2002 PRIVATE CONSUMPTION 59.8 59.8 PUBLIC CONSUMPTION17.6 17.4 INVESTMENT20.8 21.0 0.8Q 21.0 INVENTORIES -0.2 -0.1 EXPORTS30.3 30.3 IMPORTS28.3 28.5 GDP 100.0 100.0 ¶8. AS A RESULT OF THESE TRENDS, OVERALL CONSUMPTION, BOTH PUBLIC AND PRIVATE, WILL DECELERATE FROM 2001 LEVELS. (NOTE: OVERALL CONSUMPTION IS THE RESULT OF PRIVATE CONSUMPTION ACCELERATING FROM 1.1 PERCENT TO 1.3 PERCENT AND PUBLIC CONSUMPTION DECELERATING FROM 2.1 TO 0.1 PERCENT. END NOTE.) ¶9. PRIVATE INVESTMENT IS EXPECTED TO BE UP, PRIMARILY AS A RESULT OF TAX INCENTIVES PROVIDED IN THE TREMONTI LAW. THIS LAW GIVES TAX BENEFITS FOR REINVESTED PROFITS. INVESTMENT GREW 2.4 PERCENT IN 2001 AND IS EXPECTED TO INCREASE BY 2.5 PERCENT BOTH IN 2002 AND ¶2003. THE EFFECTS OF THE TREMONTI LAW ARE EXPECTED TO BE GREATEST IN THE LAST HALF OF 2002 AND FIRST HALF OF ¶2003. THE BENEFICIAL IMPACT OF THE TAX INCENTIVES ON PRIVATE INVESTMENT WILL BE PARTLY OFFSET BY THE EXPECTED DECELERATION IN PUBLIC INVESTMENTS. GDP GROWTH: 2003 UNCLASSIFIED PAGE 04 ROME 02958 02 OF 10 181526Z -------------- 003 -------------- ¶10. GDP IS EXPECTED TO ACCELERATE GRADUALLY TO 2.4 PERCENT IN 2003, SUPPORTED BY DOMESTIC DEMAND AND A RECOVERY OF EXPORTS. REDUCED INFLATIONARY PRESSURES AND IMPROVEMENT IN THE STOCK MARKET ARE EXPECTED TO BOOST HOUSEHOLD INCOME AND PRIVATE CONSUMPTION. CONSUMPTION MAY BE SLIGHTLY TEMPERED, HOWEVER, BY THE EXPECTED INCREASE IN INTEREST RATES. AS A RESULT OF THESE TRENDS, PRIVATE CONSUMPTION IS EXPECTED TO ACCELERATE FROM 1.3 PERCENT IN 2002 TO 2.5 PERCENT IN ¶2003. ¶11. THE ELIMINATION OF THE TAX DEDUCTION FOR HOME REMODELING IN 2003 IS EXPECTED TO REVERBERATE NEGATIVELY ON INVESTMENT IN CONSTRUCTION. PUBLIC INVESTMENT ALSO IS EXPECTED TO DECELERATE IN 2003. FOREIGN TRADE UNCLASSIFIED UNCLASSIFIED PTQ0869 PAGE 01 ROME 02958 03 OF 10 181527Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 EAP-00 EUR-00 EXIM-01 E-00 UTED-00 FOE-00 VC-00 FRB-00 IPS-01 H-01 TEDE-00 INR-00 ITC-01 AC-01 NSAE-00 OMB-01 OPIC-01 ACE-00 SP-00 SSO-00 STR-00 TEST-00 TRSE-00 USIE-00 FMP-00 G-00 SAS-00 /008W -------------- BEF331 181527Z /07 P 181132Z JUN 02 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 4274 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 2708 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 03 OF 10 ROME 002958 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, JONES UNCLASSIFIED PAGE 02 ROME 02958 03 OF 10 181527Z STATE PASS CEA STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 4212/ITA/MAC/OEURA/CPD/DDEFALCO E.O. 12958: N/A TAGS: ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP SUBJECT: ECONOMIC FORECAST FOR ITALY 2002-2003: JUNE 2002 PREDICTIONS -------------- ¶12. OVER THE FORECAST PERIOD, EXPORTS ARE EXPECTED TO RECOVER ONLY WHEN GLOBAL ECONOMIC CONDITIONS IMPROVE, WHICH IS EXPECTED IN THE SECOND HALF OF 2002. THE APPRECIATION OF THE EURO VIS--VIS THE DOLLAR WILL, HOWEVER, RESTRAIN EXPORT GROWTH. IMPORTS ARE EXPECTED TO GROW FASTER THAN EXPORTS AS A RESULT OF PURCHASES OF INVESTMENT GOODS ENCOURAGED UNDER THE TREMONTI LAW -- AND THE RECOVERY OF DOMESTIC DEMAND AND THE EUROS REVALUATION. ¶13. THE CURRENT ACCOUNT REGISTERED A .2 BILLION EURO DEFICIT, OR 0.01 PERCENT OF GDP IN 2001, FOLLOWING A 6.3 BILLION EURO DEFICIT, OR 0.5 PERCENT OF GDP IN ¶2000. ¶14. LATEST FOREIGN TRADE DATA FOR 2002 SHOW A MODEST DECLINE THROUGH MARCH 2002. EXPORTS DROPPED 7.1 PERCENT, WHILE IMPORTS DECREASED BY 7.8 PERCENT. UNCLASSIFIED PAGE 03 ROME 02958 03 OF 10 181527Z EXPORTS TO EU COUNTRIES DECREASED BY 8.6 PERCENT, WHILE IMPORTS FROM THE EU DECREASED BY 6.7 PERCENT. EXPORTS TO GERMANY FELL THE MOST, DOWN 14.2 PERCENT THROUGH MARCH 2002 OVER THE CORRESPONDING PERIOD IN ¶2001. (NOTE: THIS IS BAD NEWS FOR ITALIAN EXPORTERS, SINCE GERMANY IS THEIR NUMBER ONE EXPORT MARKET.) EXPORTS TO NON-EU COUNTRIES DID NOT FALL AS MUCH. ACCORDING TO THE LATEST ISTAT (ITALIAN CENTRAL BUREAU OF STATISTICS) DATA, ITALIAN EXPORTS TO ALL NON-EU AREAS (USA, TURKEY AND THE FOUR SOUTH AMERICAN N COUNTRIES OF MERCOSUR INCLUDED) DROPPED BY FIVE PERCENT IN THE FIRST FOUR MONTHS OF 2002 OVER THE CORRESPONDING PERIOD IN 2001. THIS IS THE RESULT OF A DECLINE IN EXPORTS TO MERCOSUR (DOWN 40 PERCENT THROUGH APRIL),ASIA (DOWN 12.3 PERCENT) AND THE UNITED STATES (DOWN 8.3 PERCENT),COMBINED WITH INCREASES REGISTERED IN EXPORTS TO RUSSIA (28.1 PERCENT THROUGH APRIL),OTHER EUROPEAN COUNTRIES (13.1 PERCENT) AND OPEC COUNTRIES (UP 10.8 PERCENT). ¶15. THE LATEST BALANCE OF PAYMENTS DATA SHOW THAT THE CURRENT ACCOUNT REGISTERED A 2.15 BILLION EURO DEFICIT THROUGH MARCH 2002 COMPARED TO A 2.01 BILLION EURO DEFICIT IN THE CORRESPONDING PERIOD IN 2001. THIS IS THE RESULT OF A 245 MILLION EURO IMPROVEMENT IN THE TRADE ACCOUNT, COMBINED WITH A 384 MILLION EURO DECLINE IN INVESTMENT, INCOMES AND TRANSFER BALANCES OF THE CURRENT ACCOUNT. ¶16. HOWEVER, ITALYS CURRENT ACCOUNT WILL LIKELY UNCLASSIFIED PAGE 04 ROME 02958 03 OF 10 181527Z EXPERIENCE A SURPLUS OF 3.6 BILLION EUROS IN 2002, EQUAL TO 0.5 PERCENT OF GDP, IF EXPORTS PICK UP AS A RESULT OF A RECOVERY IN THE WORLD ECONOMY. A FURTHER IMPROVEMENT IS ANTICIPATED IN 2003 WITH A 10.2 BILLION CURRENT EURO ACCOUNT SURPLUS, EQUAL TO 0.8 PERCENT OF GDP. PUBLIC ACCOUNTS -------------- ¶17. THE GOVERNMENT DEFICIT WAS 1.4 PERCENT OF GDP IN 2001, 30 BASIS POINTS ABOVE THE GOI TARGET. THE HIGHER THAN EXPECTED PUBLIC DEFICIT WAS A RESULT OF LOWER THAN EXPECTED GDP GROWTH AND HIGHER THAN EXPECTED SPENDING, PARTICULARLY IN THE HEALTH SECTOR, SPENDING RELATED TO ITALIAN PARTICIPATION IN OPERATION ENDURING FREEDOM, AND ECONOMIC ASSISTANCE TO AFGHANISTAN AND PAKISTAN. DEFICIT-REDUCTION MEASURES, ESPECIALLY THOSE OF THE 100-DAY ECONOMIC PLAN, DID NOT HAVE ANY IMMEDIATE EFFECTS. NEGATIVE MARKET PROSPECTS ALSO POSTPONED GOI PLANS TO PRIVATIZE SOME STATE-OWNED COMPANIES AND TO SELL PUBLICLY OWNED REAL ESTATE. UNCLASSIFIED UNCLASSIFIED PTQ0871 PAGE 01 ROME 02958 04 OF 10 181527Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 EAP-00 EUR-00 EXIM-01 E-00 UTED-00 FOE-00 VC-00 FRB-00 IPS-01 H-01 TEDE-00 INR-00 ITC-01 AC-01 NSAE-00 OMB-01 OPIC-01 ACE-00 SP-00 SSO-00 STR-00 TEST-00 TRSE-00 USIE-00 FMP-00 G-00 SAS-00 /008W -------------- BEF340 181527Z /07 P 181132Z JUN 02 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 4275 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 2709 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 04 OF 10 ROME 002958 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, JONES UNCLASSIFIED PAGE 02 ROME 02958 04 OF 10 181527Z STATE PASS CEA STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 4212/ITA/MAC/OEURA/CPD/DDEFALCO E.O. 12958: N/A TAGS: ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP SUBJECT: ECONOMIC FORECAST FOR ITALY 2002-2003: JUNE 2002 PREDICTIONS ¶18. THE PUBLIC DEFICIT INCREASED TO 41.4 BILLION EUROS THROUGH MAY 2002, UP 6.9 PERCENT OR 2.7 BILLION EUROS OVER THE CORRESPONDING PERIOD IN 2001. THE GOI MAINTAINS THAT IT WILL BRING DOWN THE DEFICIT TO .5 PERCENT OF GDP IN 2002. FORECASTERS BELIEVE THIS PREDICTION IS TOO OPTIMISTIC. THE MACRO ASSUMPTIONS OF THE GOI BUDGET STRATEGY, THOUGH REVISED DOWNWARD, ARE STILL TOO OPTIMISTIC AND THE PUBLIC DEFICIT IS GROWING FASTER THEN EXPECTED. REASONS INCLUDE LOWER THAN EXPECTED REVENUES FROM SALES OF GOVERNMENT-OWNED REAL ESTATE, AND THE LIMITED NUMBER OF COMPANIES OPERATING IN THE UNDERGROUND THAT HAVE BECOME LEGAL, TAX PAYING ENTITIES. FEW UNDERGROUND COMPANIES HAVE TAKEN ADVANTAGE OF A ONE-TIME PARTIAL TAX FORGIVENESS. THE GOI HAS RECEIVED ONLY FOUR MILLION EUROS IN TAXES FROM COMPANIES THAT CHANGED THEIR STATUS, FAR LESS THAN THE ONE BILLION EUROS EXPECTED. ¶19. A ONE-TIME TAX AMNESTY FOR THE REPATRIATION OF UNCLASSIFIED PAGE 03 ROME 02958 04 OF 10 181527Z CAPITAL SEEMS TO HAVE BEEN SUCCESSFUL. DURING THE NINE-MONTH PROGRAM, REPATRIATED CAPITAL WAS TAXED AT 2.5 PERCENT. THROUGH APRIL, AN ESTIMATED 32.5 BILLION EUROS WERE REPATRIATED, GENERATING TAX REVENUES OF 810 MILLION EUROS. ¶20. TO OFFSET IN PART THE HIGHER THAN EXPECTED PUBLIC DEFICIT, THE GOI PRESENTED TO PARLIAMENT IN FEBRUARY A DEFICIT CONTROL PACKAGE AIMED AT RECOVERING 675 MILLION EUROS THIS YEAR AND 2.5 BILLION EUROS NEXT YEAR, RECENTLY CONVERTED INTO LAW. MEASURES INCLUDE: ¶A. A FIVE-PERCENT CUT IN GOI PAYMENTS TO PHARMACEUTICAL COMPANIES. FINANCE MINISTER TREMONTI EXPECTS THIS MEASURE TO PRODUCE 500 MILLION EUROS IN SAVINGS. PHARMACEUTICAL COMPANIES, INCLUDING U.S.- OWNED FIRMS, HAVE OBJECTED STRONGLY TO THIS PRICE CUT; ¶B. THE DEADLINE FOR MANY PERSONAL AND CORPORATE TAX PAYMENTS WAS MOVED UP FROM JULY 31 TO JUNE 20; ¶C. AREFORM OF CASSA DEPOSITI AND PRESTITI, TWO SAVINGS AND LOAN FUNDS, THROUGH THE CREATION OF TWO COMPANIES: D1. PATRIMONIO DELLO STATO S.P.A., WHICH OWNS STATE- OWNED REAL ESTATE. THE SALE OF SUCH REAL ESTATE IS EXPECTED TO EVENTUALLY GENERATE INCOME EQUAL TO FIVE PERCENT OF GDP; D2. INFRASTRUTTURE S.P.A., WHICH IS INTENDED TO FINANCE INFRASTRUCTURE AND PUBLIC WORK PROJECTS THROUGH THE ISSUANCE OF BONDS; ¶E. THE ABOLITION OF TAX INCENTIVES FOR BANK MERGERS. ¶21. FINANCE MINISTRY OFFICIALS MAINTAIN THAT A PUBLIC UNCLASSIFIED PAGE 04 ROME 02958 04 OF 10 181527Z DEFICIT EQUAL TO .5 PERCENT OF GDP WILL BE ACHIEVABLE IF GDP GROWTH IS 2.3 PERCENT. IF GDP GROWTH IS 1.5 PERCENT, THE PUBLIC DEFICIT IS LIKELY TO BE .9 PERCENT OF GDP. IN CONTRAST TO GOVERNMENT EXPECTATIONS, WE ESTIMATE THAT THE PUBLIC DEFICIT WILL BE 1.5 PERCENT IN 2002 AND DECLINE TO ONE PERCENT IN 2003. THIS IS ONE PERCENTAGE POINT ABOVE STABILITY PACT TARGETS FOR 2002 AND 2003. ONLY IF A SUBSTANTIAL DEFICIT REDUCTION PACKAGE IS IMPLEMENTED WILL THE GOI BE NEAR A ZERO PERCENT PUBLIC DEFICIT, AS REQUIRED BY THE EU STABILITY PACT. ¶22. AT THE CENTRAL BANKS ANNUAL MEETING, BANK OF ITALY GOVERNOR ANTONIO FAZIO CALLED FOR A SUPPLEMENTARY BUDGET PACKAGE TO BRING PUBLIC FINANCES IN LINE WITH THE STABILITY PACT. FINANCE MINISTER TREMONTI SAID THERE WOULD BE NO CORRECTIVE BUDGET PACKAGE EVEN IF THE PUBLIC DEFICIT CONTINUED TO CLIMB. STRUCTURAL REFORMS -------------- UNCLASSIFIED UNCLASSIFIED PTQ0877 PAGE 01 ROME 02958 05 OF 10 181527Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 EAP-00 EUR-00 EXIM-01 E-00 UTED-00 FOE-00 VC-00 FRB-00 IPS-01 H-01 TEDE-00 INR-00 ITC-01 AC-01 NSAE-00 OMB-01 OPIC-01 ACE-00 SP-00 SSO-00 STR-00 TEST-00 TRSE-00 USIE-00 FMP-00 G-00 SAS-00 /008W -------------- BEF34E 181527Z /07 P 181132Z JUN 02 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 4276 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 2710 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 05 OF 10 ROME 002958 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, JONES UNCLASSIFIED PAGE 02 ROME 02958 05 OF 10 181527Z STATE PASS CEA STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 4212/ITA/MAC/OEURA/CPD/DDEFALCO E.O. 12958: N/A TAGS: ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP SUBJECT: ECONOMIC FORECAST FOR ITALY 2002-2003: JUNE 2002 PREDICTIONS ¶23. CENTRAL BANK GOVERNOR FAZIO ALSO URGED THE GOI TO SPEED UP STRUCTURAL LABOR, PENSION AND TAX REFORMS. OPPOSITION FROM TRADE UNIONS, WHICH HAVE PLAYED A KEY ROLE IN SOCIAL AND ECONOMIC POLICY-MAKING, HAS STALLED PROGRESS ON KEY LABOR AND ECONOMIC REFORMS. ALTHOUGH HE ENJOYS A SECURE MAJORITY IN PARLIAMENT, PM BERLUSCONI SEEKS TO BUILD CONSENSUS RATHER THAN IMPOSE MAJOR CHANGES. SINCE THIS PROCESS WILL TAKE TIME, THE PROSPECT FOR SIGNIFICANT REFORMS IS NOT ROSY. SEE REFTEL A FOR BACKGROUND ON THESE STRUCTURAL REFORMS AND THE PROSPECT FOR CHANGE. ONCE NEGOTIATIONS RESUME, WE EXPECT SOME LABOR REFORM MEASURES WILL BE ENACTED THIS YEAR, BUT THEY WILL HAVE ONLY A MINOR EFFECT ON THE ECONOMIC CLIMATE, AT LEAST IN THE SHORT AND MEDIUM TERM. ¶24. PENSION REFORM IS ANOTHER ESSENTIAL STEP FOR LONG TERM ECONOMIC HEALTH. PROPOSED REFORM MEASURES WILL LOOK AT INCENTIVES FOR WORKERS TO WORK PAST RETIREMENT AGE, LOWER CONTRIBUTIONS FOR THE NEWLY EMPLOYED AND THE TRANSFER OF COMPANIES SEVERANCE FUNDS TO PRIVATE UNCLASSIFIED PAGE 03 ROME 02958 05 OF 10 181527Z PENSION FUNDS. INFLATIONARY IMPACT OF THE EURO -------------- ¶25. THE ROUNDING UP OF PRICES FOLLOWING THE EURO CHANGEOVER AND HIGHER PRICES FOR AGRICULTURAL PRODUCTS, WHICH RESULTED FROM AN UNUSUALLY COLD WINTER, PUSHED UP INFLATION IN THE FIRST PART OF THIS YEAR. EXCLUDING THE PRELIMINARY DATA FOR MAY, RETAIL INFLATION WAS 2.4 PERCENT HIGHER IN THE FIRST FOUR MONTHS OF 2002 THAN DURING THE CORRESPONDING PERIOD IN ¶2001. ¶26. ACCORDING TO SOME ANALYSTS, HOUSEHOLD CONSUMPTION HAS BEEN DEPRESSED BY A PERCEIVED LOSS FROM THE CONVERSION TO EUROS. ACCORDING TO SOME CONSUMER ASSOCIATIONS, RESTAURANT PRICES INCREASED BY 20 PERCENT AS A RESULT OF THE EURO CHANGEOVER, AND MEAT PRICES JUMPED 10 TO 20 PERCENT AFTER THE FULL CONVERSION OF PRICES FROM LIRE TO EURO. ¶27. ACCORDING TO A RECENT POLL CARRIED OUT BY THE LEADING CONSUMER ASSOCIATION, CODACONS, SEVENTY PERCENT OF ITALIANS SURVEYED WOULD LIKE THE LIRA TO RETURN; EIGHTY PERCENT ARE CONVINCED THEY SPEND MORE IN EUROS THAN THEY DID IN LIRA PER MONTH. NINETY PERCENT OF THOSE SURVEYED SAID THEY CALCULATE PRICES AND PUT ACCOUNTS IN LIRA AS WELL AS EUROS. THIRTY PERCENT SAID THAT THEY HAVE PROBLEMS WITH THE NEW BANKNOTES, AND OFTEN CONFUSE THE ONE AND TWO EURO CENT UNCLASSIFIED PAGE 04 ROME 02958 05 OF 10 181527Z COINS. THIS CONFUSION IS MOST EVIDENT IN THE SOUTH. ACCORDING TO ANOTHER SURVEY CARRIED OUT BY DATAMEDIA, SEVENTY-SIX PERCENT OF PEOPLE SURVEYED SAY THEY SPEND MORE ON THE SAME QUANTITY OF GOODS SINCE THE ADOPTION OF THE EURO. MOREOVER, WITH RESPECT TO DECEMBER 2001, SIXTY PERCENT THINK THAT THE SAME AMOUNT OF INCOME BUYS LESS IN REAL TERMS. ¶28. AFTER THE 2.4-2.5 PERCENT PEAKS IN YEAR-TO-YEAR INFLATION REGISTERED IN THE FIRST FOUR MONTHS OF 2002, THE CPI IS EXPECTED TO SLOW, PRODUCING A 2.4 PERCENT AVERAGE INFLATION RATE THIS YEAR. WE EXPECT INFLATION TO DECLINE TO TWO PERCENT IN 2003. PRIVATIZATION -------------- ¶29. THE BERLUSCONI GOVERNMENT HAS PROPOSED THE SALE OF STATE-OWNED ENTITIES AND OF GOVERNMENT-OWNED SHARES OF MAJOR COMPANIES, INCLUDING ENERGY COMPANY ENEL AND ENTE TABACCI ITALIANI (ETI - ITALYS NATIONAL TOBACCO COMPANY.) UNCERTAIN MARKET CONDITIONS HAVE, HOWEVER, UNCLASSIFIED UNCLASSIFIED PTQ0880 PAGE 01 ROME 02958 06 OF 10 181528Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 EAP-00 EUR-00 EXIM-01 E-00 UTED-00 FOE-00 VC-00 FRB-00 IPS-01 H-01 TEDE-00 INR-00 ITC-01 AC-01 NSAE-00 OMB-01 OPIC-01 ACE-00 SP-00 SSO-00 STR-00 TEST-00 TRSE-00 USIE-00 FMP-00 G-00 SAS-00 /008W -------------- BEF359 181528Z /07 P 181132Z JUN 02 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 4277 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 2711 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 06 OF 10 ROME 002958 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, JONES UNCLASSIFIED PAGE 02 ROME 02958 06 OF 10 181528Z STATE PASS CEA STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 4212/ITA/MAC/OEURA/CPD/DDEFALCO E.O. 12958: N/A TAGS: ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP SUBJECT: ECONOMIC FORECAST FOR ITALY 2002-2003: JUNE 2002 PREDICTIONS DELAYED THE TIMING OF SUCH SALES. WHEN THE MARKET RECOVERS, THE GOVERNMENT HOPES SALES OF GOVERNMENT- OWNED ENTITIES AND SHARES WILL BRING IN 60 BILLION EUROS. THE FIRST GROUP TO BE PRIVATIZED WILL BE THE RESIDUAL STAKE OF TELECOM ITALIA (3.46 PERCENT),THE SALE OF ETI AND 85 PERCENT OF TIRRENA (MARITIME TRANSPORTATION),PLUS THE SALE OF ANOTHER TRANCHE OF ENEL (ELECTRICITY CONGLOMERATE). LABOR -------------- ¶30. GOVERNMENT DATA FROM JANUARY 2002 SHOW THE QUARTERLY NATIONAL UNEMPLOYMENT RATE AT 9.2 PERCENT, DOWN FROM 10.2 PERCENT OF JANUARY 2001, WHICH IS THE LOWEST LEVEL SINCE 1992. UNEMPLOYMENT DECREASED ALSO IN ABSOLUTE TERMS BY 7.6 PERCENT FROM 2,379,000 IN JANUARY 2001 TO 2,198,000 IN JANUARY 2002. ¶31. TRADITIONAL REGIONAL DIFFERENCES REMAIN UNCLASSIFIED PAGE 03 ROME 02958 06 OF 10 181528Z UNCHANGED, WITH THE SOUTHERN THIRD OF THE COUNTRY HAVING AN 18.8 PERCENT (20.3 PERCENT IN JANUARY 2001) UNEMPLOYMENT RATE COMPARED TO 3.9 PERCENT IN THE NORTHERN THIRD (4.2 PERCENT IN JANUARY 2001) AND SEVEN PERCENT IN CENTRAL ITALY (EIGHT PERCENT IN JANUARY 2001). EMPLOYMENT INCREASED BY 371,000 PEOPLE FROM 21,273,000 IN JANUARY 2001 TO 21,644,000 IN JANUARY 2002. THIS IS THE RESULT OF AN INCREASE OF 99,000 WORKERS IN THE NORTH-EAST (UP 2.2 PERCENT FROM JANUARY 2001) AND OF 73,000 WORKERS IN THE NORTH WEST (UP 1.2 PERCENT FROM JANUARY 2001), COMBINED WITH AN INCREASE OF 85,000 WORKERS IN THE CENTER (UP TWO PERCENT FROM JANUARY 2001) AND 114,000 WORKERS IN THE SOUTH (UP 1.9 PERCENT). ¶32. ONE-FIFTH OF TOTAL EMPLOYMENT INVOLVES TEMPORARY OR PART-TIME JOBS, PRIMARILY IN THE SERVICES SECTOR. ¶33. WE EXPECT UNEMPLOYMENT TO FALL FURTHER, TO BELOW NINE PERCENT OVER THE FORECAST PERIOD. COMMENT -------------- ¶34. FOR ITALYS GDP TO REBOUND MORE VIGOROUSLY AND SUPPORT EXPORT GROWTH, THE GOI NEEDS TO MOVE AHEAD WITH CUTS IN PUBLIC SPENDING, ACCELERATE ITS PRIVATIZATION AND INFRASTRUCTURE PROGRAMS, AND ENACT KEY REFORMS IN THE PENSION, LABOR AND TAX SYSTEMS QUICKLY. UNCLASSIFIED PAGE 04 ROME 02958 06 OF 10 181528Z ¶35. ITALY, ALONG WITH THE REST OF THE EU, WILL BENEFIT FROM A MODERATE ECONOMIC RECOVERY EXPECTED OVER THE FORECAST PERIOD. THE SOONER A GLOBAL RECOVERY BEGINS, THE HEALTHIER THE EXPORT-DRIVEN ITALIAN ECONOMY WILL BE. WE SHARE LEADING THINK TANKERS VIEW, INCLUDING THAT OF THE BANK OF ITALY, THAT THE GOIS OFFICIAL FORECASTS FOR GDP GROWTH, THE BUDGET DEFICIT AND TAX REVENUES ARE OVERLY OPTIMISTIC. THE GOI DESERVES PRAISE FOR BEGINNING TO TACKLE THE THORNY ISSUES OF PENSION AND LABOR MARKET REFORM. EVEN IF THESE REFORMS ARE ADOPTED, HOWEVER, THEIR POSITIVE EFFECTS ON THE ECONOMY WILL BE FELT ONLY BEGINNING IN 2003 OR LATER. STATISTICAL APPENDIX: TABLE OF CONTENTS -------------- SUMMARY TABLE ¶I. NATIONAL ACCOUNTS, INDUSTRIAL PRODUCTION, N, PRICES AND LABOR COSTS UNCLASSIFIED UNCLASSIFIED PTQ0883 PAGE 01 ROME 02958 07 OF 10 181528Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 EAP-00 EUR-00 EXIM-01 E-00 UTED-00 FOE-00 VC-00 FRB-00 IPS-01 H-01 TEDE-00 INR-00 ITC-01 AC-01 NSAE-00 OMB-01 OPIC-01 ACE-00 SP-00 SSO-00 STR-00 TEST-00 TRSE-00 USIE-00 FMP-00 G-00 SAS-00 /008W -------------- BEF362 181528Z /07 P 181132Z JUN 02 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 4278 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 2712 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 07 OF 10 ROME 002958 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, JONES UNCLASSIFIED PAGE 02 ROME 02958 07 OF 10 181528Z STATE PASS CEA STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 4212/ITA/MAC/OEURA/CPD/DDEFALCO E.O. 12958: N/A TAGS: ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP SUBJECT: ECONOMIC FORECAST FOR ITALY 2002-2003: JUNE 2002 PREDICTIONS I.A.GROSS DOMESTIC PRODUCT 2000-2003 (PERCENT CHANGES) I.B.INDUSTRIAL PRODUCTION AND PRICE INDICES, 2000-2003 I.C.UNEMPLOYMENT RATE, 2000-2003 II. BALANCE OF PAYMENTS II.A.FOREIGN TRADE PRICES AND QUANTITIES II.B.CURRENT ACCOUNT, 2000-2003 (BILLIONS OF EURO) II.C.CURRENT ACCOUNT, 2000-2003 (USD BILLIONS) III.PUBLIC FINANCES III.A.MEASURES OF FISCAL BALANCES, 2000-2003 III. A. 1. PUBLIC ADMINISTRATION - NATIONAL UNCLASSIFIED PAGE 03 ROME 02958 07 OF 10 181528Z ACCOUNTS BASIS (TRILLIONS OF LIRE) HISTORICAL SERIES-REAL AND NOMINAL GDP 2000-2003 ¶29. TABLES -------------- SUMMARY TABLE 2001 2002 2003 (F) (F) ANN. 4TH/ ANN. 4TH/ ANN. 4TH/ AVG 4TH/ AVG 4TH AVG 4TH GDP 1.8 0.6 1.3 2.8 2.4 2.5 DOMESTIC DEMAND 1.6 0.3 1.4 3.0 2.4 2.5 INFLATION 2.8 2.4 2.4 2.4 2.0 2.1 2.8 2.4 2.4 2.4 2.0 2.1 PRODUCER PRICES 1.9 -1.0 0.1 1.9 2.3 1.8 UNEMPLOYMENT 9.5 9.3 9.2 9.1 8.9 8.8 RATE PUBLIC ADMINISTRATION (AS PCT OF GDP) EXPENDITURES 47.2 46.8 47.1 REVENUES 45.8 45.4 46.1 DEFICIT -1.4 -1.5 -1.0 PUBLIC DEBT 109.4 105.0 102.0 UNCLASSIFIED PAGE 04 ROME 02958 07 OF 10 181528Z TRADE ACCOUNT USD BILL. 15.9 15.4 20.4 PCT OF GDP 1.5 1.4 1.6 CURRENT ACCOUNT USD BILL. 0.2 3.6 8.6 PCT OF GDP 0.0 0.3 0.7 AVG EXCHANGE RATE USD/EURO 0.89 0.90 0.97 EURO/USD 1.12 1.11 1.03 ¶I. NATIONAL ACCOUNTS, INDUSTRIAL PRODUCTION, PRICES AND UNEMPLOYMENT I.A. GROSS DOMESTIC PRODUCT (PERCENT CHANGE OVER SAME PERIOD YEAR EARLIER, 1995 PRICES) NEW SERIES UNCLASSIFIED UNCLASSIFIED PTQ0885 PAGE 01 ROME 02958 08 OF 10 181529Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 EAP-00 EUR-00 EXIM-01 E-00 UTED-00 FOE-00 VC-00 FRB-00 IPS-01 H-01 TEDE-00 INR-00 ITC-01 AC-01 NSAE-00 OMB-01 OPIC-01 ACE-00 SP-00 SSO-00 STR-00 TEST-00 TRSE-00 USIE-00 FMP-00 G-00 SAS-00 /008W -------------- BEF368 181529Z /07 P 181132Z JUN 02 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 4279 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 2713 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 08 OF 10 ROME 002958 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, JONES UNCLASSIFIED PAGE 02 ROME 02958 08 OF 10 181529Z STATE PASS CEA STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 4212/ITA/MAC/OEURA/CPD/DDEFALCO E.O. 12958: N/A TAGS: ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP SUBJECT: ECONOMIC FORECAST FOR ITALY 2002-2003: JUNE 2002 PREDICTIONS I.A.1. ANNUAL 2000 2001 2002F 2003F CONSUMPTION 2.5 1.4 1.0 2.2 .2 PRIVATE 2.7 1.1 1.3 2.5 PUBLIC 1.7 2.3 0.1 1.0 FIXED INVESTMENT 6.5 2.4 2.5 2.5 CONSTRUCTION 5.6 3.7 2.0 1.7 MACHINES/EQUIPMENT 7.1 1.5 2.8 3.1 EXPORTS 11.7 0.8 1.5 5.7 IMPORTS 9.4 0.2 1.8 6.1 GDP 2.9 1.8 1.3 2.4 ADDENDUM: GROSS ASSET FORMATION 0.9 2.6 2.7 3.3 TOTAL DOMESTIC DEMAND 2.1 1.6 1.4 2.4 FINAL DOMESTIC DEMAND 3.3 1.6 1.3 2.3 UNCLASSIFIED PAGE 03 ROME 02958 08 OF 10 181529Z I.B.2. FOURTH QUARTER OVER FOURTH QUARTER IV00/ IV01/ IV02/ IV03/ IV99 IV00 IV01F IV02F CONSUMPTION 2.5 1.0 2.2 2.1 PRIVATE 2.6 0.3 2.5 2.5 PUBLIC 2.0 2.0 0.9 0.9 FIXED INVESTMENT 3.8 1.8 2.8 3.0 CONSTRUCTION 3.8 3.7 2.5 2.0 MACHINES/EQUIPMENT 3.8 0.6 3.1 3.1 EXPORTS 9.2 -2.5 5.7 6.2 IMPORTS 7.0 -3.8 6.6 6.1 GDP 2.6 0.6 2.8 2.5 ADDENDUM: GROSS ASSET FORMATION -0.3 -1.2 6.2 3.7 TOTAL DOMESTIC DEMAND 1.9 0.3 3.0 2.5 FINAL DOMESTIC DEMAND 2.8 0.9 2.3 2.3 I.C. INDUSTRIAL PRODUCTION AND PRICE INDICES PERCENT CHANGE OVER SAME PERIOD YEAR EARLIER 2000 IV00 2001 IVO1 2002 IV02 2003 IV03 (F) (F) (F) (F) INDUSTRIAL PRODUCTION 3.1 1.3 -0.7 2.9 0.5 1.9 3.5 2.3 UNCLASSIFIED PAGE 04 ROME 02958 08 OF 10 181529Z INFLATION (IPCA) 2.5 2.7 2.8 2.4 2.4 2.4 2.0 2.1 PRODUCER PRICES(PPI) 6.0 6.5 1.9 -1.0 0.1 1.9 2.3 1.8 GDP DEFLATOR 2.2 2.7 2.6 3.3 2.0 1.5 1.0 1.0 I.D. UNEMPLOYMENT RATE 1999-2003 1999 2000 2001 2002(F) 2003(F) YEAR 11.4 10.6 9.5 9.2 8.9 4TH QTR 11.1 10.0 9.3 9.1 8.8 II. BALANCE OF PAYMENTS UNCLASSIFIED UNCLASSIFIED PTQ0887 PAGE 01 ROME 02958 09 OF 10 181529Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 EAP-00 EUR-00 EXIM-01 E-00 UTED-00 FOE-00 VC-00 FRB-00 IPS-01 H-01 TEDE-00 INR-00 ITC-01 AC-01 NSAE-00 OMB-01 OPIC-01 ACE-00 SP-00 SSO-00 STR-00 TEST-00 TRSE-00 USIE-00 FMP-00 G-00 SAS-00 /008W -------------- BEF376 181529Z /07 P 181132Z JUN 02 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 4280 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 2714 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 09 OF 10 ROME 002958 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, JONES UNCLASSIFIED PAGE 02 ROME 02958 09 OF 10 181529Z STATE PASS CEA STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 4212/ITA/MAC/OEURA/CPD/DDEFALCO E.O. 12958: N/A TAGS: ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP SUBJECT: ECONOMIC FORECAST FOR ITALY 2002-2003: JUNE 2002 PREDICTIONS II.A. FOREIGN TRADE PRICES AND QUANTITIES (PERCENTAGE CHANGE FROM PREVIOUS YEAR, LIRE PRICES) 2000 2001 2002 2003 (F) (F) EXPORT VOLUME 11.1 0.1 1.5 5.7 UNIT VALUE 6.0 3.3 0.5 2.3 IMPORT VOLUME 10.0 -0.3 1.8 6.1 UNIT VALUE 14.2 0.5 0.6 1.0 TERMS OF TRADE -7.2 -2.9 -0.1 1.3 2.7 II.B. CURRENT ACCOUNT (BILLIONS OF EURO) 2000 2001 2002 2003 (F) (F) TRADE BALANCE 10.4 17.8 17.1 21.1 EXPORTS FOB 260.9 270.9 276.2 298.5 UNCLASSIFIED PAGE 03 ROME 02958 09 OF 10 181529Z IMPORTS FOB 250.5 253.1 259.1 277.4 BALANCE AS PCT. OF GDP 0.9% 1.5% 1.4% 1.6% INVISIBLES -16.7 -18.0 -13.1 -12.2 SERVICES 1.1 0.3 0.7 1.0 INCOMES -13.1 -11.6 -10.5 -9.7 NET TRANSFERS -4.7 -6.7 -3.3 -3.5 CURRENT ACCOUNT -6.3 -0.2 5.0 8.4 PCT OF GDP -0.5% 0.3% 0.4% 0.6% AVERAGE EXCHANGE RATES (EURO/USD) 1.08 1.12 1.11 1.03 (USD/EURO) 0.92 0.90 0.90 0.97 II.C. CURRENT ACCOUNT (USD BILLION) 2000 2001 2002 2003 (F) (F) TRADE BALANCE 9.6 15.9 15.3 20.4 EXPORTS FOB 241.1 242.6 248.5 288.9 IMPORTS FOB 231.5 226.7 233.2 268.5 BALANCE AS PCT. 0F GDP 0.9% 1.5% 1.4% 1.6% INVISIBLES -15.4 -16.1 -11.8 -11.8 SERVICES 1.1 0.3 0.6 1.0 UNCLASSIFIED PAGE 04 ROME 02958 09 OF 10 181529Z INCOMES -12.1 -10.4 -9.4 -9.4 NET TRANSFERS -4.4 -6.0 -3.0 -3.4 CURRENT ACCOUNT -5.8 -0.2 3.6 8.6 PCT OF GDP -0.5% 0.0% 0.3% 0.7% III. PUBLIC FINANCES MEASURES OF FISCAL BALANCES, 2000-2003 III. A. 1. PUBLIC ADMINISTRATION - NATIONAL ACCOUNTS BASIS (BILLIONS OF EURO) REVENUES EXPENSES BALANCE PRIMARY BALANCE 2000 520,828 540,891 -20,063 54,870 PCT OF GDP 44.7 46.4 -1.7 4.7 2001 557,203 574,817 -17,614 54,870 PCT OF GDP 45.8 47.3 -1.5 4.5 UNCLASSIFIED UNCLASSIFIED PTQ0889 PAGE 01 ROME 02958 10 OF 10 181529Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 EAP-00 EUR-00 EXIM-01 E-00 UTED-00 FOE-00 VC-00 FRB-00 IPS-01 H-01 TEDE-00 INR-00 ITC-01 AC-01 NSAE-00 OMB-01 OPIC-01 ACE-00 SP-00 SSO-00 STR-00 TEST-00 TRSE-00 USIE-00 FMP-00 G-00 SAS-00 /008W -------------- BEF383 181529Z /07 P 181132Z JUN 02 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 4281 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 2715 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 10 OF 10 ROME 002958 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD TREAS FOR OASIA HARLOW, JONES UNCLASSIFIED PAGE 02 ROME 02958 10 OF 10 181529Z STATE PASS CEA STATE PASS FRB FOR GUST FRANKFURT FOR WALLAR USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 4212/ITA/MAC/OEURA/CPD/DDEFALCO E.O. 12958: N/A TAGS: ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT ECON EFIN ELAB IT KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP KPRP SUBJECT: ECONOMIC FORECAST FOR ITALY 2002-2003: JUNE 2002 PREDICTIONS 2002 (F) 569,990 588,209 -18,219 57,350 PCT OF GDP 45.4 46.8 -1.5 4.6 2003 (F) 598,572 611,558 -12,986 58,805 PCT OF GDP 46.1 47.1 -1.0 4.5 IV. HISTORICAL SERIES-REAL AND NOMINAL GDP 2000-2003 (MILLIONS OF EURO) PERIOD GDP GDP (1995 PRICES) (CURRENT PRICES) ES) 2000 1,012,804 1,164,766 Y/Y CHG 2.9% 5.1% 2001 1,030,911 1,216,581 Y/Y CHG 1.8% 4.4% UNCLASSIFIED PAGE 03 ROME 02958 10 OF 10 181529Z 2002 1,044,145 1,256,471 Y/Y CHG 1.3% 3.3% 2003 1,068,891 1,298,570 Y/Y CHG 2.4% 3.4% SEMBLER UNCLASSIFIED > 2002ROME02958 - Classification: UNCLASSIFIED