ITALIAN ECONOMY REMAINS IN LOW GEAR

UNCLAS ROME 001340

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON IT
SUBJECT: ITALIAN ECONOMY REMAINS IN LOW GEAR


1. (U) Summary -- Italy's central bank and private
economists are predicting modest growth in 2010, ranging from
0.4% to 1.0%, but they remain concerned that a stagnant jobs
picture may yet tip Italy into a double-dip recession.
Italy's already massive public debt prevents any significant
stimulus action by the GOI, leaving Italy dependent on the
stimulus programs of countries (mainly Germany) that consume
Italian exports. The government's focus on short-term
performance has all but erased discussion of much-needed
longer-term structural economic reform. End Summary


2. (U) Italy's economic performance moved briefly to center
stage in mid November as positive third quarter GDP figures
marked the end, technically, of a recession that began in the
second quarter of 2007. The cheery feeling was short-lived,
however, as September industrial production figures showed a
new steep decline. The third quarter GDP numbers prompted
forecasters to adjust their full year 2009 GDP growth
estimates to a range between negative 4.4 and negative 4.8
percent. Policy-makers, politicians and most economists Post
has consulted recently remain focused on credit and
industrial production.


3. (SBU) After a brief hiatus, Economics and Finance
Minister Giulio Tremonti resumed his public criticism of
banks for their alleged refusal to lend to Italian businesses
in their hour of need. The Central Bank's October lending
survey indeed revealed a not surprising further slowing of
credit growth from banks to firms and households. Banks
we've spoken with tell us (and the press) that the slowing
rate of credit growth (currently around 2.5% annually) is due
to a fall in loan demand, a claim the Central Bank's lending
survey supports. According to the survey, loan demand by
firms was off 20% from 6 months prior. The survey also
documents a slight tightening of bank lending conditions for
both firms and households.


4. (U) The September industrial production decline of 5.3%
dealt a harsh blow to recovery expectations. The September
data could reflect a backlash to the strong August data,
which may reflect overly aggressive rebuilding of
inventories. All the same, the September figure chilled
expectations for a speedy recovery. Over the weekend of
November 28 the research department of Confindustria, the
leading employers' association, released its spot report
anticipating a 1.6% and 1% increase on industrial production
respectively in October and November.

5.(U) At about the same time, consumer confidence surveys
that had reflected moderately optimistic Italian households
in the Spring (during the depths of the recession) have now
turned negative. This is likely due to the lagging effect on
income and demand from creeping unemployment. Unemployment
remains officially in the 8.5 percent range, but the figure
masks significant amounts of man-hours lost to the economy
from reduced work-day and unpaid vacation measures employers
have resorted to in order to avoid layoffs.


6. (SBU) Comment: Italy badly needs a pickup in external
demand for its manufacturing sector to avert significantly
higher layoffs and the consequent depressing effects on
domestic demand. Some policy-makers seem to believe that
Italian banks have a duty to sustain Italian firms, but the
banks need to look after their own financial health,
especially as loan defaults have begun to creep up (from 2.6%
in September to 4% in November). Unpleasant international
developments such as Dubai World's likely $60 billion default
(some Italian exposure there) and possible trouble in the
Eurozone sovereign debt market won't help matters. Italy's
massive budget deficit and public debt load (both of which
were enormous before the recession) have prevented the GOI
from launching a significant stimulus effort. This makes
Italy something of a stimulus "free-rider," dependent on and
benefiting from the stimulus programs of other countries
(especially Germany, a heavy consumer of Italian exports).
With all eyes on the race between unemployment and recovery,
talk of needed structural reform has almost completely
disappeared from the press.
THORNE