UNCERTAINTIES ABOUT OIL PRICES AND INTEREST RATES WEIGH UPON THE INTERNATIONAL RECOVERY

 

The international economic cycle is still positive but the pace of growth is tending to slowdown. Brent oil price tops 35 dollars; the OPEC announcement of an increase in production does not affect oil prices.
In Europe, fears of inflation (at 2.4% in July) and a weak exchange rate feed expectations of further increases in interest rates by the ECB.

In Italy, following a quite brilliant first six-month performance, the recovery in industrial production slows down slightly during the summer months. Indications of a recovery in domestic demand are stronger. However, some signs that foreign demand might be weakening starts to emerge.

The Italian economy

Following a brilliant performance in the first six months, industrial production slowed down slightly during the summer. After reaching a high in May, production dropped by 0.9% in June: according to the CSC “rapid” survey of major industrial firms, the decline was only partially compensated for in July (+0.6%); IRS (a Milan-based social research institute) estimates, based on electric energy consumption, indicate that production remained substantially stable in August at the same levels of the previous month. That the Italian recovery is currently settling down seems to be confirmed by the ISAE survey in June, which signals a moderate worsening in Italian firms’ confidence (visible in French and German firms as well) due to a slight decline in order books, which is accompanied by a less favourable trend in production.

Indications about demand signal that growth in foreign demand might be weakening while domestic demand is gaining strength. Although continuing to achieve significant increases with respect to the previous year (+13.4%), in June, nominal exports declined by 1.7% with respect to the previous month. The positive signs regarding domestic demand came from firms producing machine tools, which recorded a strong increase in domestic orders during the second quarter, and from car registrations which were 16.8% higher in August than the previous year (+3.7% the overall increase during the first eight months of the year, Chart 1). According to ISAE’s latest surveys, consumer confidence in July and August reached the highest point since May 1998, thanks to consumers’ assessments of a strong improvement in the overall economic picture and in their own personal financial situation. The same survey indicates that consumer perspectives regarding the purchase of durable goods are also favourable.

After intensifying during the previous months (-0.3% in March and –0.5% in April), the downward trend in employment in large industrial firms tapered off in May (-0.1% with respect to the previous month, net of workers benefiting from the Wage Supplementation Fund and seasonally adjusted). In the same firms, the ratio of overtime work to the total number of hours worked has remained stable since the beginning of the year at a higher level than the one recorded during the first half of 1999, but lower than the peaks reached during previous cycles. On the whole, during the first half of 2000, the number of hours covered by the Wage Supplementation Fund in industry excluding construction dropped by 24.9% with respect to the same period in 1999; the drop was significantly strong in “ordinary” hours (due to normal business conditions) covered by the fund, which fluctuated around historically low values (equal to approximately 28,000 worker-equivalents in the first quarter).

Tensions on international raw material prices intensified during the summer, and in August in particular, when crude oil prices topped the $30 threshold. According to the Confindustria index, during the July-August two-month period, lira-denominated fuel prices rose by 67.7% with respect to the previous year. Non-fuel raw material prices (+17% with respect to the July-August two-month period in 1999) were pushed upwards mainly by the prices for non-food raw materials (+21.2% with respect to the previous year). The rise in food prices was more moderate (+8.8%). All together, considering both energy and non-energy products, during the July-August two-month period, the Confindustria lira-denominated index increased by 46.5% with respect to the previous year (Chart 2).

Growth in production prices reached a 6.9% high in June to, then, settle at 6.6% in July. Intermediate goods, which rose by11% during the July-August two-month period, contributed the most to the rise. Beginning this summer, the increases began to spread to the prices for final consumption and investment goods which still show, however, rather contained increases (+1.9% and +1.1% respectively). The energy, gas and water sector prices, directly affected by increases in crude-oil prices, recorded the highest growth (30%); the increases in refined oil products (+21.7%) and in chemical products and synthetic fibers (+9%) were also quite relevant. Growth in Italian producer prices in July was 1.1 percentage points higher than average growth in the euro-area. The higher growth in production prices in Italy is due to a stronger exposure of our industrial system to increases in energy and other raw material prices.

Consumer inflation reached 2.7% in June to, then, stabilize at 2.6% in the following two months. In the euro-area, consumer prices settled at 2.4% in July. Particularly high increases were recorded in the housing, energy and fuel aggregate (+6.4% in the two months with respect to the same period of the previous year) and in the transport sector (+4.3%). Prices in the telecommunications sector (-3.2%, see Table 1), continually declining for the last 17 consecutive months, contributed towards moderating the rise in the overall price trend. Prices for health and other health-related services and products (+2.7%) and for hotels, bars and restaurants (+3.3%) were also accelerating. The latter was also affected by the influx of tourists for the Jubilee. Inflation should settle again at around 2.6% in September. In this month, increases in fuel prices and in some tariffs (electricity, gas and water) will unfavourably affect inflation. The comparison with the same month of 1999, however, when consumer prices first began to pick up, should also reflect a favourable statistical effect.

The state sector recorded a 1,000 billion lira surplus in August as compared to more than 6,500 billion recorded during the same month last year. The overall deficit for the first eight months amounted to approximately 29,000 billion lire, 3,800 billion more than in the same period in 1999. According to the Treasury Ministry, this deterioration should be attributed to extraordinary disbursements which do not affect the General Government’s economic accounts and, therefore, should not preclude the attainment of a 1.3% deficit/GDP ratio at the end of the year. Excluding such disbursements, the state sector borrowing requirement should have, in fact, improved by 10-12,000 billion lira.

A risk factor on this year’s outcome for the public accounts is represented by the expenditures from local institutions; the regions’ borrowing requirement (including health spending) jumped to 70,800 billion during the first six months, 6,800 billion more than recorded in 1999. If one considers the 12-month period ending in June 2000, the regional borrowing requirement equaled 151,500 billion, 9,600 billion more than recorded during the previous 12 months.

With respect to revenues, state fiscal receipts amounted to 278,000 billion lira during the first six months of 2000, increasing by 21.1% with respect to the same period of last year. However, the figure is not quite comparable with that of the first six months of 1999 due to the anticipation to June of in full and on account payments of the IRPEF tax (the personal income tax) and to other direct taxes (in 1999, deadlines for these payments were set for July) and to receipts from the withholding tax on capital gains. If the first of these effects is excluded, the increase in total fiscal revenues would equal 10.6% which would drop to just 5% if receipts from the tax on capital gains are also excluded.

Further indications of the trend in public accounts can also be deduced from the State budget consolidation project for 2000 in which fiscal revenues are projected to increase by 7.6% (+5.7% if receipts from capital gains are excluded), less than the expected rate of growth for total expenditures net of interest payments (8.7%; +7.3% for current primary spending, +16.8% for capital spending). The improvement in the budget balance with respect to the original projections would, thus, result from the reduction in interest payments (-7.2%).