30.09 Weekly Viewpoint : Based on the Economic and Financial Document Update, fiscal policy in Italy in 2017 will be neutral, at best.

There is very limited margin to support the cycle……

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Intesa Sanpaolo – Research Department For professional investors and advisers only

In the euro area, September confidence surveys proved stronger than expected, thanks to the rise in orders in the industrial sector in particular. On balance, the recovery in the euro area continues at a moderate pace, and concerns over the effects of Brexit have eased.

In the Update of the Economic and Financial Document, the Italian government revised down its growth estimates to 0.8% from 1.2% in 2016, and to 1% from 1.4% in 2017.The new projections are in line with our forecast, although we think the estimate for 2017 GDP is still exposed to downside risks. However, any deviations may be balanced by savings on interest expenditure, on which there is still a margin compared to the new Government estimates. The targeted deficit in 2017 has been revised from 1.8% to 2%, but the government has asked the EU to raise it to 2.4% in consideration of the costs from post-earthquake reconstruction and handling of migrant flows. Based on the Update Note, the 2017 budget will be restrictive by half a point of GDP, unless the additional 0.4% flexibility margin is allowed for, in which case the budget would be essentially neutral: all the new interventions should find adequate funding, by means of new measures, or with the spending review, or through an expansion of the tax base (voluntary disclosure is likely to be reopened). The Note estimates an expansive effect of 0.4% from programmatic measures, but most of the impact (0.3%) will derive from the sterilisation of the safeguard clauses, which was widely expected by economic agents; net of the above, the impact of the Budget on growth is slightly expansive (0.1%) for the government, despite the restriction, and this can only be explained by an unusually high multiplier (of 1) for the new discretionary measures (but not for funding), in particular for those aimed at supporting private investments (the so-called “ Industria 4.0 ” plan). If on the other hand, conservatively, the usual multiplier is used (0.5), the budget would be restrictive, or neutral in the event Brussels concede the requested 0.4%margin. For what concerns the structural balance, in July the European Commission had requested a 0.6% correction in 2017, whereas the policy framework points to an unchanged balance.

The Commission’s survey, and the IFO, INSEE, and Istat national confidence indices, come in stronger than expected in September, thanks in particular to the trend of manufacturing orders. The composite PMI, on the other hand, stayed broadly stable, as stronger activity in the manufacturing sector was offset by a slowdown in services, in Germany in particular. Our opinion is that Brexit had very little effect and that in the summer months confidence was affected more by global demand conditions than by the outcome of the referendum vote in the UK. Signs of a stabilisation of the global cycle, or even of a slight improvement, are also coming from other sources: evolution of data in the emerging countries, end of the inventories cycle in the United States. Global trade could therefore perform better than in the past few months, while continuing to grow at a modest pace. Before interpreting September survey data as the start of a reacceleration trend of the euro area cycle, we await information on industrial output and retail sales in August, due out this week, and for the batch October surveys. Confidence indicators tend to prove highly volatile in the summer months, thus a more complete picture will only merge in October. Thus, for the time being, we think it is more cautious to confirm our forecast for euro area GDP growth of 0.3% q/q at the end of 2016 as well, although we do not rule out an upward revision to 0.4% q/q. Alongside stronger than expected confidence data, this week euro area inflation increased by two tenths to 0.4%, in line with forecasts. September data will not help form a consensus within the ECB Council in favour of stepping up monetary stimulus.


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