Italy: A recap of the past month

Economy: export and business confidence data have surprised to the upside and consumer confidence improved. Hiring intentions are up, suggesting a slow but continuing drop in the unemployment rate. Actual job creation remains small, in our view, and high hiring appetite is masking a gradual repricing of labour towards more flexibility and lower wages. Borrowing costs are rising, but remain low by historical comparison. Real GDP growth, in our view, is cruising at 1.5% yoy, with upside risks.

Inflation surprised mildly to the downside in September, and should continue to trend around 1.4% yoy for the rest of the year, accelerating to 1.8% next year.

Electoral law: a new electoral law (Rosatellum) has been approved by the lower house in October and is now awaiting Senate approval. The new system allocates one-third of parliamentary seats via a majoritarian system and the remainder in a proportional system, which implies that it structurally supports the centre-right coalition. Currently a centre-right government or a coalition led by M5 are the two most likely outcomes from the 2018 elections, however beware that the poll date is far and plenty of shocks may happen before then.#ChangingItaly

What caught our eye in politics

Berlusconi has stated to the press that, if the centre-right coalition does not win, he will leave politics.

Former PM Renzi has come under pressure from various members of his party and smaller centre-left parties for putting forward an electoral law that does not give any special edge to PD. He also refused to call for primaries to nominate the Prime Minister candidate. In our view, it is not out of question that Renzi may be forced to leave the leadership of PD in favour of a less “controversial” candidate.

M5 has appointed the young Luigi Di Maio as its Prime Minister candidate. In our view, this is a risky choice for the party as di Maio is inexperienced and may end up like Rome mayor Raggi who in the end had enormous problems in putting together and retaining experienced professionals in her cabin.

Italy: Key factors to watch

Finalisation of the budget: the government has put forward its budget proposal, which will now need to be approved by parliament by the year-end.

The flash estimate for 3Q GDP will be released on 14 November, we expect to see a pick-up to 1.6% yoy, from 1.5% in 2Q.

Referendum: an independence referendum for Lombardy and Veneto will take place on 22nd  October in those two regions. The question posed to voters is whether they want to start the legislative process to seek greater autonomy similar to the already existing five regions with special status within the framework described by the Constitution (art116) and consistent with the unity of the Italian Republic. This is a policy that was put forward by the Northern League years ago, so a strong YES response is likely to add credibility in the eyes of the electorate, especially among those that may be considering switching their support out of 5 Stars & Forza Italy towards the Northern League. The opinion polls show the share in favour of independence as high as 92-94%, but it is unclear whether the turnout will breach 50% of residents.

The final vote on the electoral law is expected by November, although another verdict by the Constitutional Court may be announced in January.

2018 Budget highlights

  • The government recently approved the 2018 Budget layout, which aims to continue to consolidate the budget deficit, but it also tries to distribute a few resources to improve competitiveness and reduce social tension. The Budget will spend about two months in parliament and usually reaches final approval just before Christmas.
  • The general government deficit target is set at 1.6% of GDP from next year, while we forecast a shortfall of 2.4% this year with a minor consolidation in 2018.
  • The underlying assumptions appear very reasonable to us – in fact, more so than in the past. The key supportive factor this time around is that inflation is rising, which helps to increase budget revenues. We see real GDP growth at 1.5% or higher in the next few years (barring any major global slowdown).

The positives of this budget

  • There is a slow, but hopefully steady, plan to increase public investment for the first time since 2009.
  • The combination of a still fairly constrained fiscal stance and rising nominal GDP implies that the debt to GDP ratio WILL ACTUALLY FALL from this year onwards.
  • The government has concentrated its efforts in fiscal incentives towards employment, investment and social support, including public sector workers.

The limitations of this budget

  • While it supports the cyclical recovery, potential GDP growth for now is stuck at zero and the process of improvement is slow, in our view, and constrained by the very small budget adjustments each year.

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