Italys macroeconomic outlook Riccardo Barbieri Chief Economist - - PowerPoint PPT Presentation

Italy’s macroeconomic outlook

Riccardo Barbieri Chief Economist Department of the Treasury Economy and Finance Ministry 23 November 2017

Plan of the presentation

• 1. Update on business cycle developments and highlights from DBP 2018
• 2. Official macroeconomic forecast
• 3. Budget policy for 2018-2020
• 4. Reform plan and European Commission Recommendations

Luogo, 21/10/2013 Titolo presentazione 2

• 1. Italy’s economic recovery is gaining momentum

3

• 5
• 4
• 3
• 2
• 1

1 2 3 4 3Q 10 1Q 11 3Q 11 1Q 12 3Q 12 1Q 13 3Q 13 1Q 14 3Q 14 1Q 15 3Q 15 1Q 16 3Q 16 1Q 17 3Q 17 % GDP (quarter-on-quarter annualised) GDP (year-on-year)

Source: ISTAT

4

GDP data have consistently underestimated the recovery

Quarterly real GDP growth (% q/q)

Latest official estimate Flash estimate (T+45) Difference 2014 I 0,0

• 0,1

0,1 II

• 0,1
• 0,2

0,1 III 0,2

• 0,1

0,3 IV 0,1 0,0 0,1 2015 I 0,2 0,3

• 0,1

II 0,4 0,2 0,2 III 0,3 0,2 0,1 IV 0,3 0,1 0,2 2016 I 0,3 0,3 0,0 II 0,1 0,0 0,1 III 0,3 0,3 0,0 IV 0,4 0,2 0,2 2017 I 0,5 0,2 0,3 II 0,3 0,4

• 0,1

Source: ISTAT (including original data releases)

Economic Sentiment on the rise

5

Italy Euro area

75 85 95 105 115

• 50
• 40
• 30
• 20
• 10

10 20

Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Index Balances, % Industry Consumer Services ESI (RHS) Source: European Commission

75 85 95 105 115

• 30
• 20
• 10

10 20

Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Index Balances, % Industry Consumer Services ESI (RHS) Source: European Commission

Consumers more optimistic about their personal situation

6

Source: ISTAT

• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 80 85 90 95 100 105 07 08 09 10 11 12 13 14 15 16 17 Private consumption Consumer confidence index: personal component (RHS) % quarter-on-quarter Level

7

Investment indicators point to growth ahead despite Q1 dip

• 70
• 60
• 50
• 40
• 30
• 20
• 10

10 20 30

• 25
• 20
• 15
• 10
• 5

5 10 4Q07 4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15 4Q16 4Q17 Index % year-on-year Gross fixed investment Order books (RHS) Order expectations (RHS)

Note: Order books and order expectations data refer to October 2017. Source: ISTAT

8

Firms’ investment plans for current year point to expansion

20 25 30 35 40 45 50 55 60 65 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Diffusion Indices Manufacturing and Services Construction

Source: Bank of Italy, Survey on Inflation and Growth Expectations (3Q - 2017), October 2017

9

Auto sales remain strong, trucks take a breather after 2016 surge

• 60
• 40
• 20

20 40 60 80 100 120

• 40
• 30
• 20
• 10

10 20 30 40 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 % year-on-year % year-on-year New car registrations New commercial vehicles (RHS)

Note: Data for new commercial vehicles include buses and coaches. Source: ACEA

10

Home prices stabilising as property market volumes recover

60 70 80 90 100 110 120 130 140 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 Indices 2010=100 Number of sales Prices Real prices

Source: Bank of Italy

Residential property

11

Export growth trending up

35 40 45 50 55 60 65

• 5

5 10 15 20 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Index % year-on-year, 3-months moving avarage Exports of goods, real Trade weighted international PMI (RHS) PMI Manufacturing - New export orders (RHS)

Source: MEF calculation based on ISTAT and MARKIT data.

12

Exports more dynamic towards EU countries and US

Note: The green bubbles represent countries towards Italian exports rose in the range 0.9/22.4 per cent over the 12 months until September 2017; for the red one, the decrease is -1.5 per cent. The size of globes represents the share of a country on Italian exports. Source: ISTAT

• 40
• 30
• 20
• 10

10 20 30 40

• 40
• 30
• 20
• 10

10 20 30 40 50

• Sep. 2017 - Oct. 2016, cumulative data,

% year-on-year

• Sep. 2016 - Oct. 2015, cumulative data, % year-on-year

United States Belgium China United Kingdom Spain Netherlands Germany Austria France OPEC Mercosur Russia

Current account balance has improved sharply

13

• 60
• 40
• 20

20 40 60

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 E

€ bn Italy's current account balance

Source: Bank of Italy. Data for 2017 refer to MEF preliminary estimates based on data through to August.

Italy’s share of world exports has stabilised

14

Italy’s share of world exports to main areas of destination

1 2 3 4 5 6 7 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 % EU North America East Asia World

Source: ICE (computations on IMF-DOTS data). Figures for 2016 are preliminary.

Labour market improving

15

5 6 7 8 9 10 11 12 13 14 Nov-04 Jan-06 Mar-07 May-08 Jul-09 Sep-10 Nov-11 Jan-13 Mar-14 May-15 Jul-16 Sep-17 % Unemployment rate Source: ISTAT 22000 22200 22400 22600 22800 23000 23200 23400 Nov-04 Jan-06 Mar-07 May-08 Jul-09 Sep-10 Nov-11 Jan-13 Mar-14 May-15 Jul-16 Sep-17 absolute values in thousands Employment Source: ISTAT

Domestic inflation at low levels

16

• 1

1 2 3 4 5 6 2Q 07 2Q 08 2Q 09 2Q 10 2Q 11 2Q 12 2Q 13 2Q 14 2Q 15 2Q 16 2Q 17 % year-on-year GDP deflator Wages per-capita (whole economy)

Source: ISTAT

HICP inflation remains low, especially core inflation

17

• 2,0
• 1,0

0,0 1,0 2,0 3,0 4,0 5,0

• 2,0
• 1,0

0,0 1,0 2,0 3,0 4,0 5,0 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 % year-on-year % year-on-year HICP (LHS) HICP core PPI - consumer goods

Source: ISTAT

Growth in bank loans recovering

18

• 10
• 5

5 10 15 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Loans to firms Loans to households % year-on-year Source: Bank of Italy

Lending rates at historical lows

19

1 2 3 4 5 6 1 2 3 4 5 6 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 Sep-17 % %

Source: ECB

Euro area Germany Italy Spain France

20

Credit standards for loans to enterprises have eased

• 0,3
• 0,2
• 0,1

0,0 0,1 0,2 0,3 0,4 0,5 0,6 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Diffusion Index Loans to non-financial corporations-IT Loans to non-financial corporations - EA

Source: Bank of Italy, ECB

NPLs as a share of bank loans are falling

21

2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 % of total loans % of total loans Non financial corporation Consumer households

Source: Bank of Italy

New non-performing loan rate close to pre-crisis levels

22

2 4 6 8 10 12 2Q06 2Q07 2Q08 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17 % Total Households Non financial corporations

Source: Bank of Italy

The reform of the banking sector

Major reforms were introduced in the past two years with the aim of making the Italian banking system more efficient and capable of facing economic, technological and regulatory challenges. Governance (to promote efficiency and recapitalisation):

• reform of mutual banks
• reform of cooperative credit banks
• self-reform of banking foundations

NPLs and insolvency procedures (to address deterioration of asset quality):

• State guarantees (GACS) on the securitisation of non-performing loans
• Streamlining of insolvency procedures
• Reduction of credit recovery time

23

Banks’ recapitalisation: impact on the public finances

24

• Capital contribution, €10.2bn, will be recorded as government debt. Amount is in line with

estimate used in Stability Program (0.6% of GDP) to project 2017 debt/GDP ratio.

• Fair value of guarantees for the liquidation of Veneto banks will be recorded as deficit.
• The securitisation of Monte Paschi NPLs will involve the use of GACS for the senior tranche
• The total amount of guarantees provided in the two operations is thus €15.5bn.

millions of euros Veneto banks Monte Paschi Total Capital contribution1 4785 5400 10185 Fair value of guarantees2 400 400 memo items: Guarantees3 12351 12351 GACS4 3256 3256

• 1. Capital injection into Monte Paschi assumes that all conversion rights of retail bondholders will be exercised
• 2. Fair value of guarantees provided for the liquidation of Veneto banks
• 3. Maximum level of guarantees provided for the compulsory liquidation of Veneto Banks
• 4. Amount of Senior A1 notes in Monte Paschi's NPL securitisation covered by the state guarantee scheme

Recent NPL transactions and impact on the NPL ratio

25

• December 16th 2016

Unicredit: 17.7 billion

• June 25th 2017

Banca Popolare di Vicenza and Veneto Banca: 17.5 billion

• July 5th 2017

Monte dei Paschi: 28.6 bilion

• July 11th 2017

Carige: 1.2 billion

• Total of listed transactions:

65.0 billion

Source: MEF calculations on Bank of Italy at December 2016. Data are in billion euros and refer to gross exposures.

Significant banks Total NPL - Dec 2016 267,0 349,0 NPL/Total loans 17,6% 17,3% Disposal of NPLs 65,0 65,0 Ex post NPLs 202,0 284,0 NPL/Total loans 13,3% 14,1% Bad loans 165,0 215,0 Bad loans/Total loans 10,9% 10,7% Disposals of bad loans 56,4 56,4 Ex post bad loans 108,6 158,6 Bad loans/Total loans 7,1% 7,9%

Public pension expenditure: impact of past reforms

26

12 13 14 15 16 17 18 19 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 % of GDP Current legislation before L 232/2016 before DL 201/11 before DL 98/11 before DL 78/10 before L 243/04

Source: EFD 2017, State General Accounting Department long-term forecasting model.

Projected public pension expenditure

Pension expenditure: alternative demographic projections

27

Projected public pension expenditure

12 13 14 15 16 17 18 19 20 21 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 Legislation in force before Law 243/2004 Legislation in force before Decree Law 78/2010 Legislation in force before Decree Law 98/2011 Legislation in force before Decree Law 201/2011 Legislation in force before Law 232/2016 Current legislation

48

Debt/GDP in the medium term: end of QE and political risks

95 100 105 110 115 120 125 130 135 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 % of GDP Debt/GDP Baseline scenario Debt/GDP unexpected exit strategy from QE Debt/GDP unexpected exit strategy from QE and italian crisis

• In the scenario simulating an expected and faster discontinuation of the QE (parallel

increase of the yield curve of 200 bp in 2018-2021 with respect to the baseline) as well as in the scenario that adds to the former the impact of political instability in Italy (rise in short- term interest rates), the debt-to-GDP ratio would not significantly rise on a ten-year horizon.

• 2. Official real GDP forecasts revised up

29

October 2017 macroeconomic forecast

Source: ISTAT and Government projections for 2017-2020 (Update of the Economic and Financial Document 2017 and 2018 Draft Budgetary Plan)

Policy scenario (% change yoy) 2016 2017 2018 2019 2020 Real GDP 0.9 1.5 1.5 1.5 1.3 Domestic demand net of inventories 1.5 1.5 1.5 1.4 1.1 Inventories

• 0.4

0.1 0.0 0.0

• 0.1

Net export

• 0.1
• 0.1
• 0.1

0.0 0.2 Nominal GDP 1.7 2.1 3.1 3.4 3.4 GDP deflator 0.8 0.6 1.6 1.9 2.1 Compensation per employee 0.5 0.8 1.1 1.7 1.6 Productivity (on GDP)

• 0.4

0.4 0.5 0.4 0.4 Unit labour cost (on GDP) 0.9 0.4 0.6 1.3 1.2 Employment (FTE) 1.4 1.1 0.9 1.1 0.9 Unemployment rate 11.7 11.2 10.7 10.0 9.5 Current account balance 2.5 2.3 2.1 2.1 2.4

Medium-term official forecasts in the DBP 2018

30

October 2017 forecast: GDP components

Source: ISTAT and Government projections for 2017-2020 (Update of the Economic and Financial Document 2017 and 2018 Draft Budgetary Plan)

Policy scenario 2016 2017 2018 2019 2020 GDP 0.9 1.5 1.5 1.5 1.3 Imports 3.1 5.5 4.1 3.9 3.3 Final national consumption 1.3 1.3 1.1 1.1 0.9 Household consumption and NPISH 1.5 1.4 1.4 1.3 1.0 Government expenditure 0.5 1.0 0.3 0.7 0.5 Investment 2.8 3.1 3.3 3.0 2.3

• machinery, equipment and other

1.6 1.4 4.3 3.6 3.1

• construction

1.1 1.4 1.8 2.3 1.5 Exports 2.4 4.8 3.6 3.7 3.7

The outlook for the public finances

Update to the EFD2017 and 2018 Draft Budgetary Plan

31

(1) Net of one-off measures and cyclically adjusted. Discrepancies, if any, are due to rounding. (2) Gross of financial support to Eurozone countries. (3) Net of financial support given to other Euro area countries.

Source: ISTAT and Government projections for 2017-2020 (Update of the Economic and Financial Document 2017 and 2018 Draft Budgetary Plan)

Policy scenario % of GDP 2015 2016 2017 2018 2019 2020 General government balance

• 2.6
• 2.5
• 2.1
• 1.6
• 0.9
• 0.2

Structural balance (1)

• 0.1
• 0.9
• 1.3
• 1.0
• 0.6
• 0.2

Change in the structural balance 0.3

• 0.8
• 0.4

0.3 0.4 0.4 Primary balance 1.5 1.5 1.7 2.0 2.6 3.3 Interest expenditure 4.1 4.0 3.8 3.6 3.5 3.5 Public debt (2) 131.5 132.0 131.6 130.0 127.1 123.9 Public debt ex support EZ (3) 128.0 128.5 128.2 126.7 123.9 120.8

Balance budget and MTO to be virtually achieved in 2020

70 80 90 100 110 120 130 140

• 14
• 12
• 10
• 8
• 6
• 4
• 2

2 4 6 8 10 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 % of GDP % of GDP

Net borrowing (LHS) Primary balance (LHS) Structural balance (LHS) Debt/GDP gross (RHS) Debt/GDP net of support to EZ (RHS)

Source: ISTAT, ESA 2010.

32

Italy’s output gap & potential ouput: a comparison of estimates

33

Source: AMECO, OECD Database, IMF database, CER and DT

• Very different results for Output Gaps and

Potential Growth due to the differences in the underlying methodologies

• OECD and IMF estimate large and

negative output gaps. Instead, COM is an

• utlier as it estimates no gap in 2018.
• Adjusting the COM for labour hoarding

(Enhanced model) aligns the estimates for OG

• Is the acceleration of growth structural or

cyclical? Current method have a negative bias, as they take into account the impact

• f the crisis whereas they do not consider

the impact of structural reforms.

Output Gaps EC EC - DT Enhanced model OECD IMF CER 2015

• 2.8
• 3.9
• 4.5
• 3.3

2016

• 1.7
• 2.9
• 3.4
• 2.4
• 2.3

2017

• 0.8
• 2.2
• 2.4
• 1.6
• 1.0

2018 0.0

• 1.6
• 1.7
• 1.1
• 0.3

2019

• 1.0
• 0.3

2020

• 0.5

0.1 Potential Growth EC EC - DT Enhanced model OECD IMF CER 2015

• 0.2
• 0.1

0.5 0.0 2016

• 0.3
• 0.1

0.5 0.0 0.3 2017 0.0 0.2 1.2 0.3 0.1 2018 0.3 0.4 1.3 0.4 0.5 2019 0.4 0.5 0.5 0.8 2020 0.5 0.6 0.6 0.6

35

Faster Potential % TFP growth with CU and labour hoarding TFP trend growth Potential growth

• Estimating the TFP trend with a measure of Capacity Utilisation and with a labour-

hoarding index based on data on Cassa Integrazione Guadagni (CIG) improves the potential growth projection, especially in the 2018-2020 period.

• 0,1
• 0,05

0,05 0,1 0,15 0,2 0,25 0,3 0,35 0,4 2015 2016 2017 2018 2019 2020 % NDA 2017 NDA 2017 - Enhanced model with Capacity Utilisation of Services NDA 2017 - Enhanced model with labour hoarding

• 0,2

0,2 0,4 0,6 0,8 1 2015 2016 2017 2018 2019 2020 % NDA 2017 NDA 2017 - Enhanced model with Capacity Utilisation of Services NDA 2017 - Enhanced model with labour hoarding

• 3. Budget plan for 2018-2020

36

• For 2017, the deficit estimate is confirmed at 2.1% of GDP, thanks also to the mini-budget

requested by the European Commission and implemented via a law decree (DL 50/2017), which is worth 0.2 p.p. of GDP.

• For 2018, the Draft Budgetary Plan sets a nominal deficit target of 1.6% of GDP and a

structural balance target of 1.0% of GDP. The Budget, detailed in the 2018 draft Budget Law and a law decree (DL 148/2017), is expected to have a net impact of 0.6% of GDP on the deficit.

• The policy scenario envisages a subsequent decline in the deficit to 0.9% of GDP in 2019

and 0.2% in 2020.

• The structural balance would improve from -1.3% of GDP this year to -1.0% in 2018, -0.6% in

2019 and -0.2% in 2020, broadly achieving Italy’s MTO.

• The debt-to-GDP ratio is projected to slightly decline to 131.6% in 2017 (a decrease was

already recorded in 2015) and to fall to 123.9% in 2020.

37

Decree Law 50/2017: Key measures

• Use of resources:



Reduction of the VAT hike scheduled for 2018



Repeal of hike in fuel excise duty scheduled for 2018



Additional funds for areas hit by earthquakes (new fund for reconstruction; refinancing of the existing reconstruction fund, extension of fiscal incentives, setting up of tax-free zones)



Investment in railways and public transport



Additional resources for regions and local entities (easing of hiring freeze, investments and public infrastructure development, including schools)

• Extra funding:



Extension of VAT split-payment



Measures to increase VAT compliance (stricter rules on VAT deductions and offsets)



Flat tax rate of 21% on income from short-term lettings



Increase in taxation of lotteries, betting and tobacco



Stricter rules on foreclosure procedures



Cuts in appropriations for military missions and ministries in 2017 (about €1bn of savings)

38

Decree Law 148/2017: Key measures

• Use of resources

 refinancing unchanged policies, including peacekeeping missions, hiring of public

employees in the security sector and the Employment Fund

 increasing the financing for the SMEs Guarantee Fund (€ 0.3bn)  new resources to support financing for large companies in crisis  State loan to Alitalia (0.3 bn)

• Extra funding

 extension of discounted settlement of tax bills (cartelle esattoriali)  extension of the split-payment to all entities controlled by public administration

(with a share of at least 70%), including SOEs, economic entities and foundations

 reprogramming transfers to various entities

• Other

 extension of the Golden Power to high-tech sectors  broadening information requirements to small corporate acquisitions to increase

market transparency.

39

2018 draft Budget Law: Use of resources

• Repeal of VAT hike scheduled for 2018 and reduction of the hike for 2019 (partially financed by

DL 148/2017)

• Stimulus to public and private investment:



new resources for central and local governments



extension of tax credits on renovation of residential units, including anti-seismic rehabilitation and energy efficiency



extension of super and hyper amortisation and SMEs investment support (‘Sabatini Law’)

• Supporting permanent employment contracts for young workers: three-year 50% reduction of

social security contributions paid by employers, capped at €3,000 a year

• Measures for the Mezzogiorno:



extension of tax credit for investment in capital goods in the South and of tax relief for newly hired employees with permanent contracts



Increasing resources for the Cohesion and Development Fund (EU programming 2014- 2020)



A new fund to support growth in the size of firms operating in the South

• Additional resources (€0.3bn for 2018) for ‘Inclusion Income’, i.e. support for poor households
• New resources for the renewal of public-sector wage contracts.

40

2018 draft Budget Law: Extra funding

• Measures to combat tax evasion:

 electronic invoicing in the private sector compulsory from 1 January 2019  action against fraud in the mineral oil sector

• Spending review of Ministries formally integrated in the budget:

 budget proposals of Ministries consistent with spending saving targets set

by Decree of the President of the Council of Ministers June 28th, 2017

 Excluding gross fixed capital formation, spending related prevention of

natural disasters and seismic event, assistance and rescue at sea of refugees and poverty-alleviation measures.

41

Fiscal pressure set to decline in the policy scenario

41,0 41,5 42,0 42,5 43,0 43,5 44,0 44,5 45,0 2013 2014 2015 2016 2017 2018 % of GDP Fiscal pressure (at current legislation) Fiscal pressure (at current legislation net of €80 bonus)

Source: ISTAT and trend projections for 2017-2018 (Update to the Economic and Financial Document 2017)

41,0 41,5 42,0 42,5 43,0 43,5 44,0 44,5 45,0 2013 2014 2015 2016 2017 2018 % of GDP Fiscal pressure (target) Fiscal pressure (target net of €80 measure)

Source: ISTAT and government projections for 2017-2018 (Draft Budgetary Plan 2018)

Spending stability paves way for debt reduction

Current expenditure excluding interest payments (1999=100)

42

Source: MEF elaborations on European Commission AMECO data and ISTAT

100 120 140 160 180 200 220 240 2000 2002 2004 2006 2008 2010 2012 2014 2016 Belgium Spain Germany France Netherlands Italy (net of €80 bonus)

43

Net borrowing requirement

Source: MEF elaboration on State General Accounting Department data for State; Bank of Italy for General Government.

Borrowing requirements (cumulated values over the last 12 months)

35 40 45 50 55 60 65 70 75 80 85 Apr - 14 Oct - 14 Apr - 15 Oct - 15 Apr - 16 Oct - 16 Apr - 17 Oct - 17 Euro bn General Government State

Key drivers of the debt-to GDP ratio (policy scenario)

44

Source: ISTAT, Bank of Italy and government projections for 2017-2020 (Update to the Economic and Financial Document 2017 and 2018 Draft Budgetary Plan)

• 4
• 2

2 4 6 8 10 12

• 4
• 3
• 2
• 1

1 2 3 4 5 6 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 % points of GDP % year-on-year

Change in the debt-to-GDP ratio (RHS) Stock of debt (% change y/y) Nominal GDP (%change y/y)

45

Medium term Debt/GDP projections: underlying assumptions

• Very cautious real GDP growth assumptions in all scenarios. The shock on

primary surplus of the policy scenario is consistent with historical volatility.

0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 % of GDP

Primary Surplus

Pessimistic Optimistic Baseline 1.6 2.2 2.1 90 100 110 120 130 140 150 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2016=100

Nominal GDP

Pessimistic Optimistic Baseline 2,5 2,6 2,7 2,8 2,9 3 3,1 3,2 3,3 3,4 3,5 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 %

Implicit interest rates

Pessimistic Optimistic Baseline

• 0.4

0.2 0.1 95 100 105 110 115 120 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2016=100

Real GDP

Pessimistic Optimistic Baseline

46

Interest expenditure set to decline in the medium term

• In the pessimistic scenario, given a shock of 100 bp to the yield curve

(2017-2019) the ratio of interest expenditure-to-GDP rises to 4.1% in 2021.

• Thanks to its high average life (6.9 years) and duration (5.5 years), a

market shock has a moderate impact on net borrowing despite the magnitude (in absolute terms) of the debt stock outstanding in 2017.

2,5 2,7 2,9 3,1 3,3 3,5 3,7 3,9 4,1 4,3 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 % Pessimistic Optimistic Baseline

47

Debt/GDP set to decline in the medium term

75 85 95 105 115 125 135 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 % of GDP Debt/GDP Baseline scenario Debt/GDP Optimistic scenario Debt/GDP Pessimistic scenario

47

Total general government contingent liabilities

Source: Eurostat

2010 2011 2012 2013 2014 2015 2015

Government guarantees Total liabilities of government controlled entities classified outside general government

• f which:

Entities involved in financial activities

% of GDP Germany 20.3 18.7 17.3 16.8 15.7 15.4 110.4 105.8 Spain 12.7 14.9 21.0 18.8 12.9 9.6 29.6 26.2 France 6.6 5.5 4.5 5.5 4.5 4.2 62.7 18.5 Italy 0.8 3.5 6.2 6.2 2.7 2.2 47.4 20.6 Netherlands 10.4 9.6 7.5 6.8 3.7 4.0 108.1 17.8 United Kingdom 27.5 15.3 10.2 9.3 8.8 8.7 45.2 5.0

• 4. Reform agenda: European Commission’s view

48

European Commission – Italy CSRs for 2017 and 2018

• Fiscal policy

Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which translates into a substantial fiscal effort for 2018. Shift the tax burden from the factors of production onto taxes less detrimental to growth in a budgetary neutral way by taking decisive action to reduce the number and scope of tax expenditures, reforming the outdated cadastral system and reintroducing the first residence tax for high- income households. Broaden the compulsory use of electronic invoicing and payments.

• Governance

Reduce the trial length in civil justice through effective case management and rules ensuring procedural discipline. Step up the fight against corruption, in particular by revising the statute of limitations. Complete reforms of public employment and improve the efficiency

• f publicly-owned enterprises. Promptly adopt and implement the pending law on

competition and address the remaining restrictions to competition.

Reform agenda for the coming years: Commission’s view

49

• Banking system and insolvency procedures

Accelerate the reduction in the stock of non-performing loans and step up incentives for balance-sheet clean-up and restructuring, in particular in the segment of banks under national supervision. Adopt a comprehensive overhaul of the regulatory framework for insolvency and collateral enforcement.

• Labour market and social spending

With the involvement of social partners, strengthen the collective bargaining framework to allow collective agreements to better take into account local conditions. Ensure effective active labour market policies. Rationalise social spending and improve its composition.

50