Italy’s comprehensive policy of growth-friendly structural reforms and fiscal consolidation is well underway. Nonetheless, the economy is projected to continue contracting in the short term, reflecting budgetary tightening, weak confidence and tight credit supply. Weak growth will put further downward pressure on employment, wages and consumer prices. With gradual improvements in competitiveness, confidence and financial conditions, the economy is projected to return to growth during 2013.
The projection assumes that the government will attain its fiscal targets of structural balance in 2013 and 2014. However, as these growth projections are weaker than the government’s, the deficit rises through the projection period. Should the OECD projection be realised, further fiscal tightening in 2014 would be necessary to achieve the planned debt reduction path. The reforms of the product and labour markets which parliament has adopted over the past twelve months are impressive but must be fully and consistently implemented if they are to produce results.