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Governance

Italy falls short on reforms, growth below 1% seen – IMF

Carlo Messina, CEO of Intesa Sanpaolo

Italy's government is falling short on needed reforms while annual economic growth is projected to stay below 1% through 2023, the IMF said.

The Washington-based fund issued a report on the 2018 review of Italy less than a week after the national statistics office said the country fell into recession at the end of last year.

"The authorities' strategy falls short of comprehensive reforms needed to address the longstanding structural impediments to sustained growth and, therefore, risks leaving the economy vulnerable," the International Monetary Fund said Wednesday at the end of its consultations.

The populist government that took office on June 1 is implementing an expansive spending program that includes income support for the poor and a lower retirement age.

The ruling coalition expects 1% growth this year, while the country's central bank and the IMF in separate reports have estimated 0.6% for 2019. The European Commission may slash its own forecast to 0.2% Thursday, news agency Ansa reported from Brussels.

Lower growth will make it more difficult to reach the budget deficit target agreed to with the Commission for this year.

Growth is projected to stay below 1% annually for five years, ending 2023 at 0.6%, the IMF said.

Recovering modestly

The IMF noted that the economy has been "recovering modestly" from the financial and sovereign debt crises.

Intesa Sanpaolo CEO Carlo Messina struck an optimistic note in an interview Wednesday.

"I think that in the second part of the year, we can have a clear recovery due to internal demand acceleration," the Italian banker told Bloomberg's Nejra Cehic. "My expectation is that we can have a recovery in the exports in the second part of the year."

Italy approved a compromise budget in late December following weeks of wrangling with the European Commission that spooked investors and sent yields on 10-year government bonds soaring to 3.81% on Oct. 19. They have since fallen to about 2.8% from the 4 1/2-year high.

"Weak profitability and sustained high sovereign yields pose challenges to the banking system," according to the IMF's Article IV report.

The fund welcomed the government's goal of reducing Italy's public debt, which at more than 130% of gross domestic product is the second-highest ratio in the euro area after Greece.

'Heightened stress'

"Spillovers from heightened stress in Italy would be global and significant," the IMF staff said in an accompanying report dated Dec. 18.

"Acute stress in Italy could push global markets into uncharted territory, for example, if there were to be an unprecedented downgrade to junk status of a very large advanced sovereign issuer," the staff report said. "Given that Italian debt is held widely, a broad-based reversal of portfolio flows could occur, including from emerging markets. The impact could be large within the euro area."