INDUSTRY IS RECOVERING IN EUROPE AND IN ITALY

· The global outlook is, on the whole, favourable although a number of risks that can negatively affect the current expansionary cycle remain. In particular, crude oil prices, which have dropped below $60 a barrel (Brent), are destined to remain high and volatile in the short-medium term. Refinery capacity seems structurally insufficient to keep up with a global demand which is strongly expanding, especially for light crude products.
· The United States continues to show such an exceptional dynamism that the FED was induced to raise its reference rate again to 4%. In Asia as well, economic activity doesn't show signs of a slowdown. Indeed, Japan’s recovery appears more solid than expected after the revision of its national accounts data.
· In Europe, although industrial production is showing clear signs of recovery, it is possible that the acceleration expected for 2006 will be less strong than expected. It may indeed be curbed by persisting weakness in domestic demand and oil price increases, which are reflecting the demand from the world’s most dynamic areas. In this context, it is essential that the ECB maintain its prudent stance without letting itself be overly influenced by the rise in the rate of inflation, which is destined to be temporary. A steady interest rate policy by the ECB would strengthen the current bearish trend of the euro, which has dropped below 1.20 dollars in recent months thanks to the widening of the spread with the United States.
· In Italy, the current negative phase should have bottomed out by now. On the basis of the recent ISTAT revision as well as the latest CSC “rapid” survey, industrial production seems to have reversed its downward trend. Most of the leading indicators, including those on confidence, seem to point in this direction as well. Industrial firms are more confident regarding the trend in demand.
· However, with the positive signs regarding production, a still unsatisfactory trend in export volumes was recorded (-0.2% the variation in the first seven months of 2005 with respect to the same period of 2004). This indicates that the country is continuing to lose world market shares.
The Government has integrated and modified the 2006 budget manoeuvre, by replacing part of the revenues expected for the same year from real estate sales with tax increases and by strengthening measures aimed at curbing expenditures. The preliminary estimates for 2005 and the urgent measures undertaken in mid-October confirm the relative failure of the measures included in the 2005 budget law to control expenditure items such as health, purchases of goods and services and wages.

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