Italy is exiting recession and growth is projected to rise through 2014-15 as fiscal consolidation eases. However, economic slack will remain large. The return to growth is supported by exports, which are projected to gain further momentum in the next two years as foreign demand accelerates. Domestic demand will gain momentum during 2014 as investment turns round. Unemployment is set to remain high as the impact of rising demand is likely to initially increase average working hours of persons already employed. Cost and price pressures will stay weak.
The underlying improvement in the budget deficit was substantial in 2013. The likely 2013 deficit of 3% of GDP reflects the appropriate operation of the automatic stabilisers, but with the debt-to-GDP ratio still rising, fiscal tightening of at least as much as programmed is needed in 2014-15. Putting recent reforms into practice is essential to strengthen the still weak recovery. Further reductions in labour taxation should be part of a coherent overall tax reform.
Note: All data definitions based on internationally comparable standards and may differ in specific cases from common national definitions.