IMF: Italy Recovery Stronger But Downside Risks Persist

--Reform Slowdown, Political Uncertainty Main Threats

By Silvia Marchetti

     ROME (MNI) - Italy's economic recovery it set to continue but downside

risks persist linked to changes in monetary policy, a slowdown in reforms and

political uncertainty ahead of next year's general election, the International

Monetary Fund said Thursday 

     In its latest report on Italy, the IMF forecast GDP growth of 1.3% this

year, slowing to 1% from 2018 to 2020 as "favourable tailwinds" such as trade

and monetary and fiscal policies become less supportive.

     "The Italian economy is in the third year of a moderate recovery," the IMF

said. "Supported by exceptionally accommodative monetary policy, fiscal easing,

low commodity prices, and the government's reform efforts, the economy grew by

0.9% in 2016 and continued to expand in the first quarter of 2017."

     The brighter outlook is expected to result in a  stabilization of Italy's

public debt at about 133% of GDP and a continued fall in unemployment, the IMF

said. Italy's financial sector has also become more stable as bank

non-performing loans (NPLs) have "declined from their crisis-driven peaks."

     But more progress is needed on all fronts, the IMF said as "weak

productivity and low aggregate investment remain key challenges for faster

growth." 

     "As we look ahead there are a number of important challenges still to

tackle, including public debt, productivity growth, and incomes that must come

back to pre-crisis levels and converge to euro area", Rishi Goyal, head of the

IMF Italy team, said during a conference call.

     Italy's moderate growth path would imply a return to pre-crisis per capita

income levels only by the mid-2020s and a widening of Italy's income gap with

the faster growing euro area average.

     Even though Italy's recovery is expected to continue "risks ahead are

significant," the IMF warned. Such risks include political uncertainty, possible

setbacks to reforms, financial fragilities, the impact of monetary policy

normalization, uncertainty about U.S. policies and Brexit negotiations, the Fund

said.

     Italian authorities need to take action on reforms to exploit an easy

monetary policy that will not persist forever, the IMF said.

     "Exceptional monetary accommodation provides a favourable, if narrowing,

window to press ahead with structural, fiscal, and financial reforms," the IMF

said. 

     Following recent government support for three ailing Italian banks, the IMF

called for "prompt actions to address problems in banks with appropriate burden

sharing involving banks' shareholders and creditors, and protection as needed

for the most vulnerable retail bondholders."

     The Fund urged Italy to exploit the recovery underway to boost fiscal

adjustment towards a balanced budget but without putting at stake

growth-oriented policies and investment.

--MNI Paris Bureau; tel: +33 1-42-71-55-41; email: jack.duffy@marketnews.com

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