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GDP growth is projected to edge down to 1.5% in 2018 and 1.3% in 2019. Private consumption will continue to be the main driver of the recovery, which will continue to broaden to investment and exports. Employment gains will buttress household disposable income. Tax incentives and rising external demand will support business investment and export growth. Excess capacity is narrowing but consumer price inflation and wage pressures will remain muted.
Fiscal policy will turn from a mildly expansionary to a broadly neutral stance in 2018. As the recovery firms, the implementation of structural reforms needs to be accompanied by a gradually rising primary budget surplus. This hinges on further progress on reducing tax evasion and on rationalising fiscal expenditures and current spending. To enhance social inclusion, resources need to be shifted towards anti-poverty programmes and employment incentives targeting the young.
The large stock of banks’ non-performing loans (NPLs) and the high public debt pose financial vulnerabilities. NPLs weigh on banks’ balance sheets, heightening risks for public finances in the event of a crisis. The high public debt constrains fiscal policy by making it overly sensitive to changes in interest rates. The government’s strategy to deal with weak banks is bearing fruit and NPLs have started to decline.
Economic Survey of Italy (survey page)