ECONOMIC FORECAST FOR ITALY 2002-2003: JANUARY

UNCLAS SECTION 01 OF 08 ROME 000462

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 00462 01 OF 08 302302Z
STATE PASS CEA
STATE PASS FRB FOR GUST
FRANKFURT FOR MCCOWN
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND
4212/ITA/MAC/OEURA/CPD/DDEFALCO

E.O. 12958: N/A
TAGS: ECON EFIN ELAB ITALY'>IT KPRP
SUBJECT: ECONOMIC FORECAST FOR ITALY 2002-2003: JANUARY
2002 PREDICTIONS

REF: (A) 01 TREAS 172000Z, (B) 01 ROME 52279 (C) 01 ROME

5549


1. SUMMARY. ITALY'S ALREADY WEAK ECONOMY WILL REGISTER AN
ANEMIC GDP GROWTH RATE OF ONE PERCENT IN 2002, WITH A
MODERATE ECONOMIC RECOVERY EXPECTED ONLY IN THE SECOND HALF
OF THE YEAR. IN 2003, GDP GROWTH IS EXPECTED TO CLIMB
ABOVE TWO PERCENT. INVESTMENT WILL PROMPT THE VERY MODEST
GROWTH IN 2002, WHILE THE 2003 GROWTH WILL BE SUPPORTED BY
EXPORTS AND A GRADUAL ACCELERATION IN GROWTH OF HOUSEHOLD
CONSUMPTION, AS WELL AS AN IMPROVED GLOBAL ECONOMIC
PICTURE. INFLATION IS EXPECTED TO SLOW OVER THE FORECAST
PERIOD, ALTHOUGH THE EURO CHANGEOVER AND AN UNUSUALLY COLD
WINTER WILL PUSH INFLATION SLIGHTLY HIGHER IN THE FIRST
QUARTER OF THIS YEAR. ONE-TIME MEASURES PROPOSED TO REDUCE
THE DEFICIT WILL FALL SHORT OF THE GOIS OPTIMISTIC
PREDICTIONS. CRITICAL STRUCTURAL REFORMS WILL NOT TAKE
PLACE IN 2002, MAKING IT DIFFICULT FOR THE GOI TO MEET
BUDGET DEFICIT TARGETS FOR 2002. END SUMMARY.

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GDP GROWTH
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2. IN THE AFTERMATH OF SEPTEMBER 11 AND THE GLOBAL
ECONOMYS TAILSPIN, ITALY, LIKE THE REST OF THE EU, SAW ITS
ECONOMY STUMBLE BADLY. FOURTH QUARTER 2001 RESULTS,
ALTHOUGH STILL TRICKLING IN, ARE SHOWING ZERO PERCENT OR
EVEN A NEGATIVE GDP GROWTH RATE. THESE RESULTS MORE THAN
OFFSET THE STRONG PERFORMANCE OF THE FIRST QUARTER, WHEN
GDP ROSE AT AN ANNUALIZED RATE OF MORE THAN 3 PERCENT. WE
EXPECT THAT FINAL FIGURES WILL SHOW A GROWTH RATE OF 1.8
PERCENT. AVERAGE EURO-ZONE GROWTH IN 2001 IS EXPECTED TO
HAVE BEEN 1.5 PERCENT. FOR ITALY, THIS IS A SILVER LINING
IN AN OTHERWISE BLEAK PICTURE.


3. FOR MOST OF THE 1990S AND INCLUDING 2000, ITALY HAS HAD
A SLOWER GROWTH RATE THAN THE AVERAGE OF EURO-ZONE
ECONOMIES. THE GOI STILL OFFICIALLY FORECASTS THAT GDP
GROWTH IN 2001 WILL RANGE FROM 1.9 PERCENT TO TWO PERCENT.


4. THE ACROSS-THE-BOARD WEAK FOURTH QUARTER PERFORMANCE,
FROM INDUSTRIAL PRODUCTION TO HOUSEHOLD CONSUMPTION, WILL
REVERBERATE FOR MONTHS. GDP GROWTH FOR 2002 IS EXPECTED TO
BE AN ANEMIC ONE PERCENT, ACCORDING TO THE CONSENSUS
FORECAST OF ITALIAN RESEARCH INSTITUTIONS. THE OECD IN ITS
ANNUAL REPORT PREDICTS A GDP GROWTH RATE OF 1.2 PERCENT. IN
CONTRAST, THE GOI PREDICTS 2.3 PERCENT GDP GROWTH.


5. WE CONCUR WITH LEADING THINK-TANKS THAT THE GOIS
PREDICTION IS TOO OPTIMISTIC. THE GLOBAL ECONOMY IS NOT
EXPECTED TO BEGIN TO REBOUND UNTIL THE SECOND HALF OF THIS
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YEAR, WHICH WILL CONTINUE TO DEPRESS ITALIAN EXPORTS TO ITS
MAJOR MARKETS: THE U.S. AND GERMANY. THE LATTERS MORE
PROFOUND ECONOMIC WOES ARE BAD NEWS FOR ITALIAN EXPORTERS,
SINCE GERMANY IS THEIR NUMBER ONE EXPORT MARKET.


6. INVESTMENT WILL CONTINUE AT MODERATE RATES. THE GOI
PREDICTS THAT THE TREMONTI LAW, WHICH PROVIDES TAX BENEFITS
FOR REINVESTED PROFITS, WILL SPUR SIGNIFICANT INVESTMENT IN
2002, WHICH, IN TURN, WILL PROP UP GDP GROWTH. WE BELIEVE
THAT, GIVEN GLOBAL ECONOMIC UNCERTAINTIES, ITALIAN
COMPANIES WILL MAKE MARKET MOVES CAUTIOUSLY AND POSTPONE
MAJOR INVESTMENTS. WE EXPECT THAT THE POSITIVE EFFECTS OF
THE TREMONTI LAW WILL ONLY BEGIN TO BE FELT IN THE LATTER
HALF OF THE YEAR. THE GOI ALSO EXPECTS AN UPTURN IN
HOUSEHOLD CONFIDENCE AND CONSUMPTION. AGAIN, THE CONSENSUS
IS THAT CONSUMERS ARE ADOPTING A WAIT AND SEE ATTITUDE
UNTIL THERE ARE SIGNS OF A GLOBAL ECONOMIC RECOVERY.
ECONOMIC WOES IN REGIONS OUTSIDE OF EUROPE ALSO MAY HAVE A
BOOMERANG EFFECT. SOME 200,000 INVESTORS IN ITALY HAVE
ASSETS, THROUGH MUTUAL FUNDS AND INDIVIDUAL STOCKS, IN
ARGENTINA. (ACCORDING TO THE LATEST ESTIMATES, ITALIANS
OVERALL EXPOSURE IN ARGENTINA IS ABOUT E12 BILLION. TWO

UNCLASSIFIED

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2002ROME00462 - Classification: UNCLASSIFIED