ECONOMIC FORECAST FOR ITALY 2003-2004:

UNCLAS SECTION 06 OF 08 ROME 000379 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD UNCLASSIFIED PAGE 02 ROME 00379 06 OF 08 010327Z TREAS FOR OASIA HARLOW, CARNES 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 2003-2004: JANUARY 2003 PREDICTIONS ANN. 4TH/ ANN. 4TH/ ANN. 4TH/ AVG 4TH/ AVG 4TH AVG 4TH GDP 0.4 1.1 1.1 1.7 2.0 2.5 DOMESTIC DEMAND 0.7 0.7 0.9 1.7 2.0 2.4 INFLATION 2.5 2.8 2.2 2.0 1.8 1.7 PRODUCER PRICES -0.2 1.3 1.4 1.1 0.9 0.7 UNEMPLOYMENT 9.0 8.9 8.9 8.9 8.9 8.8 RATE PUBLIC ADMINISTRATION (AS PCT OF GDP) EXPENDITURES 46.8 47.1 46.7 REVENUES 44.4 44.6 44.2 DEFICIT -2.4 -2.5 -2.5 PUBLIC UNCLASSIFIED PAGE 03 ROME 00379 06 OF 08 010327Z DEBT 108.3 107.8 106.7 TRADE ACCOUNT USD BILL. 13.4 12.6 12.2 PCT OF GDP 1.1 1.0 0.9 CURRENT ACCOUNT USD BILL. 3.5 -3.1 2.7 PCT OF GDP -0.3 -0.2 -0.2 AVG EXCHANGE RATE USD/EURO 0.97 1.00 1.00 00 EURO/USD 1.03 1.00 1.00 ¶I. NATIONAL ACCOUNTS, INDUSTRIAL PRODUCTION, PRICES AND UNEMPLOYMENT I.A. GROSS DOMESTIC PRODUCT (PERCENT CHANGE OVER SAME PERIOD YEAR EARLIER, 1995 PRICES) NEW SERIES I.A.1. ANNUAL 2001 2002 2003F 2004F CONSUMPTION 1.4 0.5 1.2 1.7 PRIVATE 1.1 0.2 1.2 1.9 PUBLIC 2.3 1.4 1.0 1.0 UNCLASSIFIED PAGE 04 ROME 00379 06 OF 08 010327Z FIXED INVESTMENT 2.4 -1.1 2.0 3.4 CONSTRUCTION 3.7 0.6 1.7 1.7 MACHINES/EQUIPMENT 1.5 -2.2 2.2 4.6 EXPORTS 0.8 -0.1 3.0 4.8 IMPORTS 0.2 0.8 2.2 5.1 GDP 1.8 0.4 1.1 2.0 ADDENDUM: GROSS ASSET FORMATION 2.6 1.4 -0.1 3.4 TOTAL DOMESTIC DEMAND 1.6 0.7 0.9 2.0 FINAL DOMESTIC DEMAND 1.6 0.2 1.3 2.0 I.B.2. FOURTH QUARTER OVER FOURTH QUARTER IV01/ IV02/ IV03/ IV04/ IV00 IV01 IV02F IV03F CONSUMPTION 0.6 0.4 1.4 2.1 PRIVATE 0.2 0.3 1.5 2.5 PUBLIC 1.9 0.9 0.9 0.9 FIXED INVESTMENT 1.9 0.0 2.0 3.5 CONSTRUCTION 3.6 1.0 2.0 2.0 MACHINES/EQUIPMENT 0.7 -0.7 -0.7 4.6 UNCLASSIFIED UNCLASSIFIED PTQ2843 PAGE 01 ROME 00379 07 OF 08 010329Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 SRPP-00 EAP-00 EXME-00 EUR-00 E-00 UTED-00 VC-00 FRB-00 TEDE-00 INR-00 ITC-01 LAB-01 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 OPM-01 ACE-00 SP-00 SSO-00 SS-00 STR-00 TEST-00 USIE-00 DRL-01 G-00 SAS-00 /008W -------------- 2F54C5 010329Z /15 P 311223Z JAN 03 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 7921 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 3085 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 07 OF 08 ROME 000379 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD UNCLASSIFIED PAGE 02 ROME 00379 07 OF 08 010329Z TREAS FOR OASIA HARLOW, CARNES 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 2003-2004: JANUARY 2003 PREDICTIONS EXPORTS -3.1 2.9 4.0 6.0 IMPORTS -3.6 1.5 4.4 6.0 GDP 0.6 1.1 1.7 2.5 ADDENDUM: GROSS ASSET FORMATION 0.1 1.5 3.1 3.5 TOTAL DOMESTIC DEMAND 0.5 0.7 1.7 2.4 FINAL DOMESTIC DEMAND 0.9 0.4 1.5 2.4 I.C. INDUSTRIAL PRODUCTION AND PRICE INDICES PERCENT CHANGE OVER SAME PERIOD YEAR EARLIER 2001 IV01 2002 IVO2 2003 IV03 2004 IV04 (F) (F) (F) (F) INDUSTRIAL PRODUCTION -0.7 2.9 1.9 0.3 2.4 0.4 3.3 3.1 UNCLASSIFIED PAGE 03 ROME 00379 07 OF 08 010329Z INFLATION (IPCA) 2.8 2.4 2.5 2.8 2.2 2.0 1.8 1.7 PRODUCER PRICES(PPI) 1.9 -1.0 -0.2 1.3 1.4 1.1 0.9 0.7 GDP DEFLATOR 2.6 4.8 2.2 1.8 2.2 2.2 1.8 1.9 I.D. UNEMPLOYMENT RATE 1999-2003 2000 2001 2002(F) 2003(F) 2004(F) YEAR 10.6 9.5 9.0 8.9 8.9 4TH QTR 10.0 9.3 8.9 8.9 8.8 II. BALANCE OF PAYMENTS II.A. FOREIGN TRADE PRICES AND QUANTITIES (PERCENTAGE CHANGE FROM PREVIOUS YEAR, LIRE PRICES) 2001 2002 2003 2004 (F) (F) EXPORT VOLUME 0.5 -0.1 3.0 4.8 UNIT VALUE 3.3 -0.2 1.4 0.9 IMPORT VOLUME 0.6 0.8 2.2 5.1 UNIT VALUE 0.5 0.4 2.8 1.0 TERMS OF TRADE -2.9 -0.6 -1.4 -0.2 UNCLASSIFIED PAGE 04 ROME 00379 07 OF 08 010329Z II.B. CURRENT ACCOUNT (BILLIONS OF EURO) 2001 2002 2003 2004 (F) (F) (F) TRADE BALANCE 17.8 13.912.6 12.1 EXPORTS FOB 270.9 270.1 282.0 298.1 IMPORTS FOB 253.1 256.2 269.4 286.0 BALANCE AS PCT. OF GDP 1.5% 1.1% 1.0% 0.9% INVISIBLES -18.0 -17.5 -15.7 -14.8 SERVICES 0.3 -2.4 -0.8 -1.4 INCOMES -11.5 -11.7 -11.7 -10.4 NET TRANSFERS -6.7 -3.4 -3.1 -3.0 CURRENT ACCOUNT -0.2 -3.6 -3.1 -2.7 PCT OF GDP 0.0% -0.3% -0.2% -0.2% AVERAGE EXCHANGE RATES (EURO/USD) 1.12 1.03 1.00 1.00 (USD/EURO) 0.90 0.97 1.00 1.00 UNCLASSIFIED UNCLASSIFIED PTQ2844 PAGE 01 ROME 00379 08 OF 08 010329Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 SRPP-00 EAP-00 EXME-00 EUR-00 E-00 UTED-00 VC-00 FRB-00 TEDE-00 INR-00 ITC-01 LAB-01 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 OPM-01 ACE-00 SP-00 SSO-00 SS-00 STR-00 TEST-00 USIE-00 DRL-01 G-00 SAS-00 /008W -------------- 2F54CA 010329Z /15 P 311223Z JAN 03 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 7922 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 3086 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 08 OF 08 ROME 000379 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD UNCLASSIFIED PAGE 02 ROME 00379 08 OF 08 010329Z TREAS FOR OASIA HARLOW, CARNES 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 2003-2004: JANUARY 2003 PREDICTIONS II.C. CURRENT ACCOUNT (USD BILLION) 2000 2001 2002 2003 (F) (F) TRADE BALANCE 15.9 13.4 12.6 12.1 2.1 EXPORTS FOB 242.6 261.2 282.0 298.1 IMPORTS FOB 226.7 247.8 269.4 286.0 BALANCE AS PCT. 0F GDP 1.5% 1.1% 1.0% 0.9% INVISIBLES -16.1 -16.9 -15.7 -14.8 SERVICES 0.3 -2.3 -0.9 -1.3 INCOMES -10.4 -11.4 -11.7 -10.4 NET TRANSFERS -6.0 -3.2 -3.1 -3.0 CURRENT ACCOUNT -0.2 -3.5 -3.1 -2.7 UNCLASSIFIED PAGE 03 ROME 00379 08 OF 08 010329Z PCT OF GDP 0.0% -0.3% -0.2% -0.2% 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 520,828 541,102 -20,169 55,096 PCT OF GDP 44.7 46.5 -1.7 4.7 2001 556,797 583,595 -26,798 45,686 PCT OF GDP 45.8 48.0 -2.2 3.8 .8 2002 (F) 554,824 585,309 -30,484 45,084 PCT OF GDP 44.4 46.8 -2.4 3.6 2003 (F) 576,029 608,297 -32,268 39,522 PCT OF GDP 44.6 47.1 -2.5 3.1 2004 (F) 591,600 625,098 -33,498 34,703 PCT OF GDP 44.2 46.7 -2.5 2.6 UNCLASSIFIED PAGE 04 ROME 00379 08 OF 08 010329Z IV. HISTORICAL SERIES-REAL AND NOMINAL GDP 2000-2003 (MILLIONS OF EURO) PERIOD GDP GDP (1995 PRICES) (CURRENT PRICES) 2000 1,012,804 1,164,766 Y/Y CHG 2.9% 5.1% 2001 1,030,785 1,216,581 Y/Y CHG 1.8% 4.4% 2002 1,035,300 1,249,362 Y/Y CHG 0.4% 2.7% 2003 1,047,055 1,290,716 Y/Y CHG 1.1% 3.3% 2004 1,068,149 1,339,923 Y/Y CHG 2.0% 3.8% SEMBLER UNCLASSIFIED > @@@OASYS@@@ UNCLASSIFIED PTQ2826 PAGE 01 ROME 00379 05 OF 08 010323Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 SRPP-00 EAP-00 EXME-00 EUR-00 E-00 UTED-00 VC-00 FRB-00 TEDE-00 INR-00 ITC-01 LAB-01 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 OPM-01 ACE-00 SP-00 SSO-00 SS-00 STR-00 SVC-00 TEST-00 USIE-00 DRL-01 G-00 SAS-00 /008W -------------- 2F5458 010323Z /15 P 311223Z JAN 03 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 7919 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 3083 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 05 OF 08 ROME 000379 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD UNCLASSIFIED PAGE 02 ROME 00379 05 OF 08 010323Z TREAS FOR OASIA HARLOW, CARNES 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 2003-2004: JANUARY 2003 PREDICTIONS 2003 AT THE EARLIEST. TO STIMULATE DEMAND AND HELP ASSURE A HEALTHY GDP GROWTH, THE GOI IS BETTING ON ITS AMBITIOUS INFRASTRUCTURE AND PUBLIC WORKS PROGRAM. HOWEVER, THE GOI CONTINUES TO DRAG ITS FEET ON STRUCTURAL REFORMS, SUCH AS LABOR AND PENSION REFORM, WHICH COULD BOLSTER ITALYS LONG-TERM ECONOMIC HEALTH. COMMENT -------------- ¶26. WE SHARE THIS CONCERN OVER THE ECONOMIC IMPACT OF THE SLOW PACE OF ESSENTIAL STRUCTURAL REFORMS, AND PREDICT THAT THE DEFICIT/GDP RATIO WILL EXCEED THE GOI TARGETS OF 1.5 PERCENT FOR 2003 AND 0.6 FOR 2004, RESPECTIVELY. WE ESTIMATE A DEFICIT/GDP RATIO OF 2.5 PERCENT OVER THE FORECAST PERIOD. THE DEBT/GDP RATIO WILL DECREASE SLOWLY AND REMAIN ABOVE THE OFFICIAL GOI TARGET OF 100.4 PERCENT OF GDP FOR 2004. UNCLASSIFIED PAGE 03 ROME 00379 05 OF 08 010323Z ¶27. THE OUTCOME OF THE FIAT CRISIS ALSO COULD AFFECT THE PROGNOSIS FOR THE ITALIAN ECONOMY. FIAT AND ITS RELATED COMPANIES ACCOUNT FOR 0.4-0.5 PERCENT OF GDP. IF THE GOVERNMENT INCURS SOME FINANCIAL OBLIGATION TO HELP RESOLVE THE CRISIS, FIATS BOTTOM LINE MAY IMPROVE, BUT THE GOVERNMENTS BALANCE SHEET WILL NOT. ¶28. ON THE OTHER HAND, ANY GOI MOVEMENT TO IMPLEMENT DELAYED STRUCTURAL REFORMS COULD IMPROVE THE ECONOMIC OUTLOOK SIGNIFICANTLY. END COMMENT ¶28. STATISTICAL APPENDIX: TABLE OF CONTENTS -------------- SUMMARY TABLE ¶I. NATIONAL ACCOUNTS, INDUSTRIAL PRODUCTION, PRICES AND LABOR COSTS 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 UNCLASSIFIED PAGE 04 ROME 00379 05 OF 08 010323Z 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 ACCOUNTS BASIS (TRILLIONS OF LIRE) HISTORICAL SERIES-REAL AND NOMINAL GDP 2000-2003 ¶38. TABLES -------------- SUMMARY TABLE 2002 2003 2004 2002 2003 2004 (F) (F) SVC FOR TWO PARA 28'S UNCLASSIFIED > @@@OASYS@@@ UNCLASSIFIED PTQ2816 PAGE 01 ROME 00379 04 OF 08 010319Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 SRPP-00 EAP-00 EXME-00 EUR-00 E-00 UTED-00 VC-00 FRB-00 TEDE-00 INR-00 ITC-01 LAB-01 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 OPM-01 ACE-00 SP-00 SSO-00 SS-00 STR-00 TEST-00 USIE-00 DRL-01 G-00 SAS-00 /008W -------------- 2F5416 010319Z /15 P 311223Z JAN 03 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 7918 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 3082 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 04 OF 08 ROME 000379 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD UNCLASSIFIED PAGE 02 ROME 00379 04 OF 08 010319Z TREAS FOR OASIA HARLOW, CARNES 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 2003-2004: JANUARY 2003 PREDICTIONS ¶20. NORTH-SOUTH REGIONAL DIFFERENCES CONTINUE. SOUTHERN ITALY HAS AN AVERAGE EIGHTEEN PERCENT (18.9 PERCENT IN OCTOBER 2001) UNEMPLOYMENT RATE, WHILE HIGHLY PRODUCTIVE NORTHERN ITALY HAS A TIGHT JOB MARKET WITH ONLY FOUR PERCENT UNEMPLOYMENT. CENTRAL ITALY HAS A 6.3 PERCENT RATE (DOWN FROM SEVEN PERCENT IN OCTOBER 2001). EMPLOYMENT ROSE BY 234,000 PEOPLE FROM 21,698,000 IN OCTOBER 2001 TO 21,932,000 IN OCTOBER 2002. THIS REFLECTS AN INCREASE OF 71,000 JOBS IN THE NORTH (UP 0.6 PERCENT FROM OCTOBER 2001), AN INCREASE OF 63,000 JOBS IN CENTRAL ITALY (UP 1.4 PERCENT FROM OCTOBER 2001) AND A 99,000 NEW JOBS IN THE SOUTH (UP 1.6 PERCENT). LESS THAN ONE-FIFTH OF TOTAL EMPLOYMENT INVOLVES TEMPORARY OR PART-TIME JOBS, PRIMARILY IN THE SERVICES SECTOR. ¶21. THE INCREASE IN EMPLOYMENT LIKELY REFLECTS THE IMPLEMENTATION OF SOMEWHAT LESS RESTRICTIVE LABOR LAWS AND OF GOI FISCAL INCENTIVES FOR WORKERS TO MOVE FROM UNCLASSIFIED PAGE 03 ROME 00379 04 OF 08 010319Z THE UNDERGROUND ECONOMY TO THE FORMALIZED ECONOMY. PUBLIC FINANCE -------------- ¶22. IN JANUARY 2003, THE GOI ANNOUNCED THAT THE PUBLIC SECTOR DEFICIT DECREASED BY 25 PERCENT FROM END-2001 TO END-2002. THE IMPROVEMENT RESULTED FROM A POSTPONEMENT OF PAYMENTS (SPENDING CAPS WERE IMPOSED ON GOVERNMENT EXPENDITURES) AND FROM ANTICIPATED REVENUES OF E9.1 BILLION IN REAL ESTATE SALES. WE PREDICT THE 2002 DEFICIT/GDP WAS 2.4 PERCENT, ALTHOUGH THE GOI ESTIMATES THAT THE 2002 DEFICIT/GDP RATIO WAS 2.2 PERCENT (SLIGHTLY ABOVE THE GOI TARGET OF 2.1 PERCENT). AN E40 BILLION SWAP IN TREASURY BONDS ALSO IS THOUGHT TO HAVE REDUCED THE DEBT/GDP RATIO TO AROUND 108-109 PERCENT. THE GOIS SALE OF ITS REMAINING 3.5 PERCENT STAKE IN TELECOM ITALIA, WHICH BROUGHT IN E1.4 BILLION IN REVENUES, ALSO IMPROVED THE DEBT/GDP RATIO. ¶23. EU ECONOMIC AND MONETARY AFFAIRS COMMISSIONER PEDRO SOLBES HAS CRITICIZED ITALY FOR ITS FREQUENT USE OF ONE-TIME MEASURES, SUCH AS TAX AMNESTIES. (ONE-TIME MEASURES HAVE RISEN FROM 0.7 PERCENT TO 1.2 PERCENT OF GDP.) THE COMMISSION ALSO HAS EXPRESSED CONCERN ABOUT THE SUSTAINABILITY OF ITALYS FISCAL ADJUSTMENT. ITS E20 BILLION 2003 DEFICIT REDUCTION PACKAGE RELIES MOSTLY ON THESE ONE-TIME MEASURES AND SECURITIZATION OF STATE-OWNED ASSETS, RATHER THAN ON MORE SUSTAINABLE STRUCTURAL CHANGE. SOLBES BELIEVES ITALYS PUBLIC UNCLASSIFIED PAGE 04 ROME 00379 04 OF 08 010319Z DEFICIT WILL APPROACH THREE PERCENT IN 2004. FOR THIS REASON, THE COMMISSION IS URGING ITALY TO CONSIDER A SUPPLEMENTAL BUDGET PACKAGE, WITH STRONG DEFICIT CUTTING MEASURES, BEFORE MARCH. (NOTE: MID-MARCH IS THE DEADLINE FOR ITALYS TAX AMNESTY, WHICH, ACCORDING TO GOI CALCULATIONS, IS EXPECTED TO PRODUCE E8 BILLION IN ADDITIONAL REVENUES. END-NOTE). ¶24. IN A RECENT REPORT ON ITALYS ECONOMY, MORGAN STANLEY ESTIMATED THAT 60 PERCENT OF THE DEFICIT REDUCTION PACKAGE IS BASED ON TAX AMNESTIES AND THE SALE OF REAL ESTATE (PRESENTED AS SECURITIZED ASSETS). THE DEBT/GDP RATIO IS CLOSER TO 110 PERCENT, ACCORDING TO MORGAN STANLEY. IN ITS REPORT, THE FIRM ALSO UNDERSCORED THE UNCERTAINTY OF GDP GROWTH, THE EXPECTED INCREASE IN INFLATION, AND WHAT IT TERMED GOI SHORT-SIGHTEDNESS FOR NOT TACKLING STRUCTURAL REFORM. ¶25. THE CONSENSUS OF ITALYS LEADING FORECAST/ECONOMIC INSTITUTIONS IS FOR A MODERATE ECONOMIC RECOVERY, MID- UNCLASSIFIED > @@@OASYS@@@ UNCLASSIFIED PTQ2803 PAGE 01 ROME 00379 01 OF 08 010315Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 SRPP-00 EAP-00 EXME-00 EUR-00 E-00 UTED-00 VC-00 FRB-00 TEDE-00 INR-00 ITC-01 LAB-01 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 OPM-01 ACE-00 SP-00 SSO-00 SS-00 STR-00 TEST-00 USIE-00 DRL-01 G-00 SAS-00 /008W -------------- 2F53D2 010315Z /15 P 311223Z JAN 03 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 7915 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 3079 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 01 OF 08 ROME 000379 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD UNCLASSIFIED PAGE 02 ROME 00379 01 OF 08 010315Z TREAS FOR OASIA HARLOW, CARNES 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 2003-2004: JANUARY 2003 PREDICTIONS REF: A. 02 TREAS 41955Z ¶B. 02 ROME 4673 ¶1. SUMMARY: ITALY IS LIKELY TO GROW ONLY MODERATELY OVER THE FORECAST PERIOD. IN 2002, THE GDP GREW BY A MEAGER 0.4 PERCENT (BELOW THE EU AVERAGE),BUT SHOULD INCREASE BY 1.1 PERCENT IN 2003 AND BY TWO PERCENT IN 2004, SUPPORTED BY A MODEST RECOVERY IN DOMESTIC DEMAND. ¶2. THE GLOBAL ECONOMIC DOWNTURN CONTINUES TO DAMPEN ITALIAN EXPORTS, WHICH ALSO ARE HURT BY THE EUROS STRENGTH VERSUS THE DOLLAR. IN 2002, THE CONVERSION TO THE EURO AND INCREASED UTILITIES PRICES PUSHED UP RETAIL PRICE LEVELS BY 2.5 PERCENT. HOWEVER, INFLATION IS EXPECTED TO DECLINE TO 2.2 PERCENT IN 2003 AND TO 1.8 PERCENT IN 2004. THROUGH 2002 SALES OF REAL ESTATE AND OTHER ONE-TIME REVENUE MEASURES, THE GOI WAS ABLE TO BRING THE DEFICIT/GDP RATIO TO 2.4 UNCLASSIFIED PAGE 03 ROME 00379 01 OF 08 010315Z PERCENT, SLIGHTLY ABOUT ITS 2002 TARGET OF 2.2 PERCENT. HOWEVER, OVER THE FORECAST PERIOD, ITALY WILL HAVE DIFFICULTY IN KEEPING ITS DEFICIT WITHIN EU TARGETS. END SUMMARY. GDP GROWTH: 2002 -------------- ¶3. AFTER SLOW GROWTH IN THE FIRST HALF OF 2002, ITALYS ECONOMY GREW BY 0.3 PERCENT FROM THE SECOND TO THE THIRD QUARTER. THE THIRD QUARTER OF 2002 WAS 0.5 PERCENT HIGHER THAN THE THIRD QUARTER OF 2001. DATA FROM THE CENTRAL GOVERNMENTS RESEARCH DIVISION, N, ISTAT, SHOW THAT SLIGHTLY HIGHER EXPORTS AND PRIVATE/PUBLIC CONSUMPTION, UP 0.2 PERCENT AND 1.6 PERCENT RESPECTIVELY, SUPPORTED GDP GROWTH FROM THE SECOND TO THIRD QUARTER. HOWEVER, FOR THE FIRST NINE MONTHS OF 2002, INVESTMENT (MOSTLY IN MACHINERY AND EQUIPMENT) FELL OVERALL BY 1.4 PERCENT; EXPORTS ALSO DECLINED 1.1 PERCENT. CONCERNS ABOUT GLOBAL ECONOMIC CONDITIONS AND INCREASED INFLATION (PARTIALLY BOOSTED BY THE EUROS INTRODUCTION) HAVE SLOWED CONSUMER DEMAND. ITALYS EXPORTS HAVE ALSO BEEN DEPRESSED BY THE ECONOMIC DIFFICULTIES OF ITS MAJOR EXPORT MARKETS, GERMANY AND THE UNITED STATES. ¶4. INDUSTRIAL PRODUCTION FIGURES WERE DISAPPOINTING. IN THE FIRST TEN MONTHS OF 2002, INDUSTRIAL PRODUCTION FELL BY 2.6 PERCENT FROM THE CORRESPONDING PERIOD IN ¶2001. CONFINDUSTRIA, ITALYS INDUSTRIALISTS UNCLASSIFIED PAGE 04 ROME 00379 01 OF 08 010315Z ASSOCIATION, ESTIMATES A 0.7 PERCENT DECLINE IN INDUSTRIAL PRODUCTION IN THE FOURTH QUARTER 2002. THIS IS IN LINE WITH THE CENTRAL BANK FORECAST. BASED ON THESE TRENDS, WE EXPECT FIGURES TO SHOW A 1.9 .9 PERCENT DECLINE IN INDUSTRIAL PRODUCTION IN 2002, FOLLOWED BY A MODERATE RECOVERY DURING THE FORECAST PERIOD. ¶5. ISAES LATEST BUSINESS SURVEY SHOWED A FURTHER DROP IN BUSINESS CONFIDENCE IN DECEMBER 2002. ISAES CONSUMER CONFIDENCE INDEX FELL ANOTHER THREE POINTS IN DECEMBER 2002, REACHING THE LOWEST LEVEL REGISTERED SINCE 1998. ONE BRIGHT SPOT: CAR SALES WERE UP FOR THE MONTH. AS A RESULT OF THE GOVERNMENTS TAX INCENTIVES FOR NEW CAR PURCHASES, CAR SALES INCREASED BY A HEALTHY 51 PERCENT IN DECEMBER 2002. OVERALL, HOWEVER, CAR SALES WERE STILL DOWN 5.9 PERCENT OVER 2001 LEVELS. ¶6. PRIVATE CONSUMPTION IS EXPECTED TO SHOW A DECLINE FROM 1.1 PERCENT IN 2001 TO 0.2 PERCENT IN 2002. WEAK CONSUMER CONSUMPTION IS THE RESULT OF LOWER PORTFOLIO UNCLASSIFIED UNCLASSIFIED PTQ2806 PAGE 01 ROME 00379 02 OF 08 010316Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 SRPP-00 EAP-00 EXME-00 EUR-00 E-00 UTED-00 VC-00 FRB-00 TEDE-00 INR-00 ITC-01 LAB-01 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 OPM-01 ACE-00 SP-00 SSO-00 SS-00 STR-00 TEST-00 USIE-00 DRL-01 G-00 SAS-00 /008W -------------- 2F53DE 010316Z /15 P 311223Z JAN 03 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 7916 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 3080 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 02 OF 08 ROME 000379 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD UNCLASSIFIED PAGE 02 ROME 00379 02 OF 08 010316Z TREAS FOR OASIA HARLOW, CARNES 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 2003-2004: JANUARY 2003 PREDICTIONS INCOME PARTICULARLY AFFECTED BY THE CRISES IN LATIN AMERICA AND HIGHER INFLATION. FINANCE MINISTER TREMONTI ESTIMATES THAT ITALIANS LOST THE EQUIVALENT OF 1.1 PERCENT IN HOUSEHOLD INCOME BECAUSE OF FAILED ARGENTINE INVESTMENTS. ACCORDING TO THE CENTRAL BANK, ITALIAN HOUSEHOLDS LOST ONE-THIRD OF THE VALUE OF THEIR STOCK PORTFOLIO FROM THE SECOND QUARTER 2001 TO THE CORRESPONDING PERIOD IN 2002, EQUAL TO E 216 BILLION. IN THE FIRST HALF OF 2002, HOUSEHOLDS SOLD OFF STOCKS VALUED AT BY E 6 BILLION, WHILE INCREASING THEIR INVESTMENT IN TREASURY BILLS AND BONDS BY E 70.3 BILLION. ¶7. PRIVATE INVESTMENT DECLINED IN 2002. PRIVATE INVESTMENT FOR THE FIRST NINE MONTHS OF 2002 WAS DOWN 1.1 PERCENT OVER THE CORRESPONDING PERIOD IN 2001. INVESTMENT IN MACHINERY AND EQUIPMENT FELL FURTHER, DOWN 2.7 PERCENT - A RESULT OF A 4.1 PERCENT DECREASE IN INVESTMENT IN MACHINERY, COMBINED WITH A 2.4 UNCLASSIFIED PAGE 03 ROME 00379 02 OF 08 010316Z PERCENT INCREASE IN INVESTMENT IN TRANSPORTATION. WE EXPECT THAT FIGURES WILL SHOW ONLY A MODEST RECOVERY IN THE LAST PART OF 2002. THESE WERE LIKELY THE RESULT OF LAST MINUTE INVESTMENTS TO TAKE ADVANTAGE OF TAX INCENTIVES, GRANTED UNDER THE TREMONTI LAW FOR REINVESTED PROFITS, AND ENVIRONMENT INCENTIVES FOR INVESTMENT IN CLEANER TRANSPORTATION EQUIPMENT. ¶8. INVESTMENT IN CONSTRUCTION ALSO WAS DISAPPOINTING, UP JUST 0.5 PERCENT IN THE FIRST NINE MONTHS OF 2002. WE ASSUME A 0.6 PERCENT INCREASE FOR 2002, WELL BELOW THE TWO PERCENT GROWTH ESTIMATED BY THE ASSOCIATION OF THE BUILDING COMPANIES, ANCE, WHICH HAD ANTICIPATED SIGNIFICANT INVESTMENT IN PUBLIC WORKS BY THE END OF ¶2002. GDP GROWTH: 2003-2004 -------------- ¶9. GDP GROWTH IS EXPECTED TO INCREASE GRADUALLY TO 1.1 PERCENT AND TWO PERCENT RESPECTIVELY IN 2003 AND 2004, SUPPORTED BY DOMESTIC DEMAND AND A RECOVERY OF EXPORTS, ALTHOUGH THE STRONGER EURO VERSUS THE DOLLAR WILL HURT EXPORTS. LOWER INFLATIONARY PRESSURES AND A MODEST RECOVERY OF THE STOCK MARKET ARE LIKELY TO GRADUALLY BOOST HOUSEHOLD INCOME AND PRIVATE CONSUMPTION. AS A RESULT OF THESE TRENDS, PRIVATE CONSUMPTION IS EXPECTED TO INCREASE FROM 0.2 PERCENT IN 2002 TO 1.2 PERCENT AND 1.9 PERCENT IN 2003 AND 2004, RESPECTIVELY. UNCLASSIFIED PAGE 04 ROME 00379 02 OF 08 010316Z ¶10. INVESTMENT SHOULD INCREASE GRADUALLY TO TWO PERCENT IN 2003 AND TO 3.4 PERCENT IN 2004, IF BUSINESS AND ECONOMIC CONDITIONS IMPROVE AS EXPECTED. THE EXPIRATION OF A TAX DEDUCTION FOR HOME REMODELING AT SEPTEMBER 2003 IS, HOWEVER, LIKELY TO DEPRESS CONSTRUCTION INVESTMENT. THIS SHOULD BE OFFSET BY HIGHER PUBLIC INVESTMENT IN INFRASTRUCTURE. INFLATION TRENDS -------------- ¶11. RETAIL INFLATION WAS 2.5 PERCENT IN 2002, A RESULT OF THE EURO CHANGEOVER, WHICH RESULTED IN THE ROUNDING UP OF PRICES, AND HIGHER PRICED UTILITIES, ESPECIALLY ENERGY. ¶12. ITALIAN CONSUMERS AND SOME INDEPENDENT RESEARCH INSTITUTES BELIEVE THAT OFFICIAL FIGURES UNDERSTATE 2002 INFLATION. PRICES OF SUCH BASIC ITEMS AS NEWSPAPERS, COFFEE, BUS, SUBWAY AND TICKETS ROSE UNCLASSIFIED UNCLASSIFIED PTO0930 PAGE 01 ROME 00379 03 OF 08 010317Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 SRPP-00 EAP-00 EXME-00 EUR-00 E-00 UTED-00 VC-00 FRB-00 TEDE-00 INR-00 ITC-01 LAB-01 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 OPM-01 ACE-00 SP-00 SSO-00 SS-00 STR-00 TEST-00 USIE-00 DRL-01 G-00 SAS-00 /008W -------------- 2F53FC 010317Z /15 P 311223Z JAN 03 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 7917 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 3081 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 03 OF 08 ROME 000379 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD UNCLASSIFIED PAGE 02 ROME 00379 03 OF 08 010317Z TREAS FOR OASIA HARLOW, CARNES 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 2003-2004: JANUARY 2003 PREDICTIONS SUBSTANTIALLY IN 2002. ACCORDING TO SOME CONSUMER ASSOCIATIONS, RESTAURANT PRICES ROSE BY 20 PERCENT OVER THE YEAR SINCE THE EURO WAS INTRODUCED, AND MEAT PRICES JUMPED 10 TO 20 PERCENT. PARTLY IN RESPONSE TO THIS CONCERN, THE MARKET BASKET USED FOR INFLATION CALCULATIONS WAS REVISED AT THE BEGINNING OF 2003. ¶13. IN LINE WITH THE CONSENSUS FORECAST, WE ESTIMATE A MODEST REDUCTION IN INFLATION OVER THE FORECAST PERIOD TO 2.2 PERCENT IN 2003 AND TO 1.8 PERCENT IN 2004. THE PRICE OF UTILITIES IS LIKELY TO INCREASE SIGNIFICANTLY IN EARLY 2003, GIVEN THE UNCERTAIN SITUATION IN THE MIDDLE EAST. FOREIGN TRADE -------------- ¶14. ITALYS SHARE OF WORLD TRADE DECREASED FROM 3.9 PERCENT IN 2001 TO 3.7 PERCENT IN 2002. ITALYS UNCLASSIFIED PAGE 03 ROME 00379 03 OF 08 010317Z EXPORTS HAVE BEEN SLOWED BY THE RECESSION IN GERMANY, ITS TOP EXPORT MARKET. EXPORTS ARE EXPECTED TO RECOVER ONLY WHEN GLOBAL ECONOMIC CONDITIONS IMPROVE, LIKELY IN THE FIRST HALF OF 2003 OR LATER. HOWEVER, IF THE STRENGTH OF THE EURO CONTINUES, EXPORT GROWTH WILL LIKELY BE RESTRAINED. ¶15. THE LATEST FOREIGN TRADE DATA THROUGH OCTOBER 2002 SHOW THAT EXPORTS DROPPED 3.3 PERCENT, WHILE IMPORTS FELL BY 5.7 PERCENT. EXPORTS TO EU COUNTRIES DECREASED BY 5.8 PERCENT, WHILE IMPORTS FROM THE EU DECREASED BY 4.1 PERCENT. EXPORTS TO GERMANY FELL THE MOST, DOWN 11.7 PERCENT THROUGH OCTOBER 2002 OVER THE CORRESPONDING PERIOD IN 2001. ¶16. EXPORTS TO NON-EU COUNTRIES DID NOT DECLINE AS MUCH. ACCORDING TO THE LATEST ISTAT DATA, ITALIAN EXPORTS TO ALL NON-EU AREAS (INCLUDING THE U.S., TURKEY AND THE FOUR SOUTH AMERICAN COUNTRIES OF MERCOSUR) DECREASED 0.2 PERCENT IN THE FIRST TEN MONTHS OF 2002 OVER THE CORRESPONDING PERIOD IN 2001. THESE REFLECT A DECLINE IN EXPORTS TO MERCOSUR (36.3 PERCENT THROUGH OCTOBER),ASIA (6.9 PERCENT),NON-EU EUROPEAN COUNTRIES (3.5 PERCENT),JAPAN (3.1 PERCENT) AND THE UNITED STATES (1.8 PERCENT). AT THE SAME TIME, EXPORTS INCREASED TO CHINA (28.2 PERCENT THROUGH OCTOBER),RUSSIA (12.8 PERCENT),OPEC COUNTRIES (5.1 PERCENT) AND EU CANDIDATE COUNTRIES (3.5 PERCENT). ¶17. THE LATEST BALANCE OF PAYMENTS DATA SHOW A CURRENT ACCOUNT DEFICIT OF E3.5 BILLION EURO THROUGH UNCLASSIFIED PAGE 04 ROME 00379 03 OF 08 010317Z OCTOBER 2002, COMPARED TO A MODEST DEFICIT (E22 MILLION) IN THE CORRESPONDING PERIOD IN 2001. THIS IS THE RESULT OF A FIVE BILLION EURO DECLINE IN INVESTMENT, INCOMES AND TRANSFER BALANCES IN THE CURRENT ACCOUNT, COMBINED WITH AN E1.5 BILLION IMPROVEMENT IN THE TRADE ACCOUNT. ¶18. OVERALL, ITALYS CURRENT ACCOUNT DEFICIT WILL APPROACH 0.3 PERCENT OF GDP. IF EXPORTS PICK UP AS A RESULT OF A RECOVERY IN THE WORLD ECONOMY, WE EXPECT AN IMPROVEMENT IN 2003 AND 2004. LABOR -------------- ¶19. GOVERNMENT DATA FROM OCTOBER 2002 SHOW THE QUARTERLY NATIONAL UNEMPLOYMENT RATE AT 8.9 PERCENT, DOWN FROM 9.3 PERCENT OF OCTOBER 2001 AND THE LOWEST LEVEL SINCE 1992. UNEMPLOYMENT DECREASED 3.3 PERCENT IN ABSOLUTE TERMS, FROM 2,225,000 IN OCTOBER 2001 TO 2,152,000 IN OCTOBER 2002. UNCLASSIFIED > @@@OASYS@@@ UNCLASSIFIED PTQ2803 PAGE 01 ROME 00379 01 OF 08 010315Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 SRPP-00 EAP-00 EXME-00 EUR-00 E-00 UTED-00 VC-00 FRB-00 TEDE-00 INR-00 ITC-01 LAB-01 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 OPM-01 ACE-00 SP-00 SSO-00 SS-00 STR-00 TEST-00 USIE-00 DRL-01 G-00 SAS-00 /008W -------------- 2F53D2 010315Z /15 P 311223Z JAN 03 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 7915 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 3079 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 01 OF 08 ROME 000379 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD UNCLASSIFIED PAGE 02 ROME 00379 01 OF 08 010315Z TREAS FOR OASIA HARLOW, CARNES 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 2003-2004: JANUARY 2003 PREDICTIONS REF: A. 02 TREAS 41955Z ¶B. 02 ROME 4673 ¶1. SUMMARY: ITALY IS LIKELY TO GROW ONLY MODERATELY OVER THE FORECAST PERIOD. IN 2002, THE GDP GREW BY A MEAGER 0.4 PERCENT (BELOW THE EU AVERAGE),BUT SHOULD INCREASE BY 1.1 PERCENT IN 2003 AND BY TWO PERCENT IN 2004, SUPPORTED BY A MODEST RECOVERY IN DOMESTIC DEMAND. ¶2. THE GLOBAL ECONOMIC DOWNTURN CONTINUES TO DAMPEN ITALIAN EXPORTS, WHICH ALSO ARE HURT BY THE EUROS STRENGTH VERSUS THE DOLLAR. IN 2002, THE CONVERSION TO THE EURO AND INCREASED UTILITIES PRICES PUSHED UP RETAIL PRICE LEVELS BY 2.5 PERCENT. HOWEVER, INFLATION IS EXPECTED TO DECLINE TO 2.2 PERCENT IN 2003 AND TO 1.8 PERCENT IN 2004. THROUGH 2002 SALES OF REAL ESTATE AND OTHER ONE-TIME REVENUE MEASURES, THE GOI WAS ABLE TO BRING THE DEFICIT/GDP RATIO TO 2.4 UNCLASSIFIED PAGE 03 ROME 00379 01 OF 08 010315Z PERCENT, SLIGHTLY ABOUT ITS 2002 TARGET OF 2.2 PERCENT. HOWEVER, OVER THE FORECAST PERIOD, ITALY WILL HAVE DIFFICULTY IN KEEPING ITS DEFICIT WITHIN EU TARGETS. END SUMMARY. GDP GROWTH: 2002 -------------- ¶3. AFTER SLOW GROWTH IN THE FIRST HALF OF 2002, ITALYS ECONOMY GREW BY 0.3 PERCENT FROM THE SECOND TO THE THIRD QUARTER. THE THIRD QUARTER OF 2002 WAS 0.5 PERCENT HIGHER THAN THE THIRD QUARTER OF 2001. DATA FROM THE CENTRAL GOVERNMENTS RESEARCH DIVISION, N, ISTAT, SHOW THAT SLIGHTLY HIGHER EXPORTS AND PRIVATE/PUBLIC CONSUMPTION, UP 0.2 PERCENT AND 1.6 PERCENT RESPECTIVELY, SUPPORTED GDP GROWTH FROM THE SECOND TO THIRD QUARTER. HOWEVER, FOR THE FIRST NINE MONTHS OF 2002, INVESTMENT (MOSTLY IN MACHINERY AND EQUIPMENT) FELL OVERALL BY 1.4 PERCENT; EXPORTS ALSO DECLINED 1.1 PERCENT. CONCERNS ABOUT GLOBAL ECONOMIC CONDITIONS AND INCREASED INFLATION (PARTIALLY BOOSTED BY THE EUROS INTRODUCTION) HAVE SLOWED CONSUMER DEMAND. ITALYS EXPORTS HAVE ALSO BEEN DEPRESSED BY THE ECONOMIC DIFFICULTIES OF ITS MAJOR EXPORT MARKETS, GERMANY AND THE UNITED STATES. ¶4. INDUSTRIAL PRODUCTION FIGURES WERE DISAPPOINTING. IN THE FIRST TEN MONTHS OF 2002, INDUSTRIAL PRODUCTION FELL BY 2.6 PERCENT FROM THE CORRESPONDING PERIOD IN ¶2001. CONFINDUSTRIA, ITALYS INDUSTRIALISTS UNCLASSIFIED PAGE 04 ROME 00379 01 OF 08 010315Z ASSOCIATION, ESTIMATES A 0.7 PERCENT DECLINE IN INDUSTRIAL PRODUCTION IN THE FOURTH QUARTER 2002. THIS IS IN LINE WITH THE CENTRAL BANK FORECAST. BASED ON THESE TRENDS, WE EXPECT FIGURES TO SHOW A 1.9 .9 PERCENT DECLINE IN INDUSTRIAL PRODUCTION IN 2002, FOLLOWED BY A MODERATE RECOVERY DURING THE FORECAST PERIOD. ¶5. ISAES LATEST BUSINESS SURVEY SHOWED A FURTHER DROP IN BUSINESS CONFIDENCE IN DECEMBER 2002. ISAES CONSUMER CONFIDENCE INDEX FELL ANOTHER THREE POINTS IN DECEMBER 2002, REACHING THE LOWEST LEVEL REGISTERED SINCE 1998. ONE BRIGHT SPOT: CAR SALES WERE UP FOR THE MONTH. AS A RESULT OF THE GOVERNMENTS TAX INCENTIVES FOR NEW CAR PURCHASES, CAR SALES INCREASED BY A HEALTHY 51 PERCENT IN DECEMBER 2002. OVERALL, HOWEVER, CAR SALES WERE STILL DOWN 5.9 PERCENT OVER 2001 LEVELS. ¶6. PRIVATE CONSUMPTION IS EXPECTED TO SHOW A DECLINE FROM 1.1 PERCENT IN 2001 TO 0.2 PERCENT IN 2002. WEAK CONSUMER CONSUMPTION IS THE RESULT OF LOWER PORTFOLIO UNCLASSIFIED UNCLASSIFIED PTQ2806 PAGE 01 ROME 00379 02 OF 08 010316Z ACTION EB-00 INFO LOG-00 AID-00 CEA-01 CIAE-00 CTME-00 DODE-00 WHA-00 SRPP-00 EAP-00 EXME-00 EUR-00 E-00 UTED-00 VC-00 FRB-00 TEDE-00 INR-00 ITC-01 LAB-01 VCE-00 AC-01 NSAE-00 NSCE-00 OMB-01 OPIC-01 OPM-01 ACE-00 SP-00 SSO-00 SS-00 STR-00 TEST-00 USIE-00 DRL-01 G-00 SAS-00 /008W -------------- 2F53DE 010316Z /15 P 311223Z JAN 03 FM AMEMBASSY ROME TO DEPT OF TREASURY WASHDC PRIORITY SECSTATE WASHDC 7916 INFO USDOC WASHDC DEPT OF LABOR WASHDC EU MEMBER STATES COLLECTIVE AMEMBASSY OTTAWA USEU BRUSSELS 3080 AMEMBASSY TOKYO AMCONSUL MILAN AMCONSUL FLORENCE AMCONSUL NAPLES AMCONSUL FRANKFURT UNCLAS SECTION 02 OF 08 ROME 000379 SIPDIS DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA LABOR FOR ILAB PARIS ALSO FOR USOECD UNCLASSIFIED PAGE 02 ROME 00379 02 OF 08 010316Z TREAS FOR OASIA HARLOW, CARNES 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 2003-2004: JANUARY 2003 PREDICTIONS INCOME PARTICULARLY AFFECTED BY THE CRISES IN LATIN AMERICA AND HIGHER INFLATION. FINANCE MINISTER TREMONTI ESTIMATES THAT ITALIANS LOST THE EQUIVALENT OF 1.1 PERCENT IN HOUSEHOLD INCOME BECAUSE OF FAILED ARGENTINE INVESTMENTS. ACCORDING TO THE CENTRAL BANK, ITALIAN HOUSEHOLDS LOST ONE-THIRD OF THE VALUE OF THEIR STOCK PORTFOLIO FROM THE SECOND QUARTER 2001 TO THE CORRESPONDING PERIOD IN 2002, EQUAL TO E 216 BILLION. IN THE FIRST HALF OF 2002, HOUSEHOLDS SOLD OFF STOCKS VALUED AT BY E 6 BILLION, WHILE INCREASING THEIR INVESTMENT IN TREASURY BILLS AND BONDS BY E 70.3 BILLION. ¶7. PRIVATE INVESTMENT DECLINED IN 2002. PRIVATE INVESTMENT FOR THE FIRST NINE MONTHS OF 2002 WAS DOWN 1.1 PERCENT OVER THE CORRESPONDING PERIOD IN 2001. INVESTMENT IN MACHINERY AND EQUIPMENT FELL FURTHER, DOWN 2.7 PERCENT - A RESULT OF A 4.1 PERCENT DECREASE IN INVESTMENT IN MACHINERY, COMBINED WITH A 2.4 UNCLASSIFIED PAGE 03 ROME 00379 02 OF 08 010316Z PERCENT INCREASE IN INVESTMENT IN TRANSPORTATION. WE EXPECT THAT FIGURES WILL SHOW ONLY A MODEST RECOVERY IN THE LAST PART OF 2002. THESE WERE LIKELY THE RESULT OF LAST MINUTE INVESTMENTS TO TAKE ADVANTAGE OF TAX INCENTIVES, GRANTED UNDER THE TREMONTI LAW FOR REINVESTED PROFITS, AND ENVIRONMENT INCENTIVES FOR INVESTMENT IN CLEANER TRANSPORTATION EQUIPMENT. ¶8. INVESTMENT IN CONSTRUCTION ALSO WAS DISAPPOINTING, UP JUST 0.5 PERCENT IN THE FIRST NINE MONTHS OF 2002. WE ASSUME A 0.6 PERCENT INCREASE FOR 2002, WELL BELOW THE TWO PERCENT GROWTH ESTIMATED BY THE ASSOCIATION OF THE BUILDING COMPANIES, ANCE, WHICH HAD ANTICIPATED SIGNIFICANT INVESTMENT IN PUBLIC WORKS BY THE END OF ¶2002. GDP GROWTH: 2003-2004 -------------- ¶9. GDP GROWTH IS EXPECTED TO INCREASE GRADUALLY TO 1.1 PERCENT AND TWO PERCENT RESPECTIVELY IN 2003 AND 2004, SUPPORTED BY DOMESTIC DEMAND AND A RECOVERY OF EXPORTS, ALTHOUGH THE STRONGER EURO VERSUS THE DOLLAR WILL HURT EXPORTS. LOWER INFLATIONARY PRESSURES AND A MODEST RECOVERY OF THE STOCK MARKET ARE LIKELY TO GRADUALLY BOOST HOUSEHOLD INCOME AND PRIVATE CONSUMPTION. AS A RESULT OF THESE TRENDS, PRIVATE CONSUMPTION IS EXPECTED TO INCREASE FROM 0.2 PERCENT IN 2002 TO 1.2 PERCENT AND 1.9 PERCENT IN 2003 AND 2004, RESPECTIVELY. UNCLASSIFIED PAGE 04 ROME 00379 02 OF 08 010316Z ¶10. INVESTMENT SHOULD INCREASE GRADUALLY TO TWO PERCENT IN 2003 AND TO 3.4 PERCENT IN 2004, IF BUSINESS AND ECONOMIC CONDITIONS IMPROVE AS EXPECTED. THE EXPIRATION OF A TAX DEDUCTION FOR HOME REMODELING AT SEPTEMBER 2003 IS, HOWEVER, LIKELY TO DEPRESS CONSTRUCTION INVESTMENT. THIS SHOULD BE OFFSET BY HIGHER PUBLIC INVESTMENT IN INFRASTRUCTURE. INFLATION TRENDS -------------- ¶11. RETAIL INFLATION WAS 2.5 PERCENT IN 2002, A RESULT OF THE EURO CHANGEOVER, WHICH RESULTED IN THE ROUNDING UP OF PRICES, AND HIGHER PRICED UTILITIES, ESPECIALLY ENERGY. ¶12. ITALIAN CONSUMERS AND SOME INDEPENDENT RESEARCH INSTITUTES BELIEVE THAT OFFICIAL FIGURES UNDERSTATE 2002 INFLATION. PRICES OF SUCH BASIC ITEMS AS NEWSPAPERS, COFFEE, BUS, SUBWAY AND TICKETS ROSE UNCLASSIFIED > 2003ROME00379 - Classification: UNCLASSIFIED