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

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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

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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@@@

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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

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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

>
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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

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2003ROME00379 - Classification: UNCLASSIFIED