News analysis: Italy on its way to full recovery despite some weakness signs in early 2015

Despite a recent reduction of industrial turnover and sales, Italy is still on its way to a full recovery thanks to a combination of favorable factors and country's own efforts, an Italian analyst has said.

In January 2015, Italian industrial sales fell by 1.6 percent in seasonally adjusted terms compared to the previous month, showing a 3.1 percent decrease in foreign demand, the National Institute for Statistics (ISTAT) stated in late March.

This result reversed a 1.4 percent gain on monthly basis shown in December.

Industrial production and orders also decreased in January, and this uncertain trend fueled new concerns that the country might still be unable to leave its six-year-long economic crisis behind.

Yet, some experts suggested the industrial decrease hide different tendencies among sectors and type of goods and that it should not be a matter of excessive concern.

"The reduction seems to be mainly associated with the 27 percent oil-related-product price fall," Piero Esposito with the School of European Political Economy at LUISS University in Rome told Xinhua.

"The decrease in oil prices spilled over to the whole energy sector, with a 13.6 percent decrease, and, to a lower extent, to have ripple effect on all other branches of the economy," he added.

Yet, there were also positive signs. The production of transport equipment increased its turnover by 10 percent, and the automotive sector grew by 18.9 percent. These data coupled with a 14.7 percent increase in orders.

Therefore, the economist seemed confident.

"Despite the negative figures, I believe Italy is finally on its way to a full recovery: domestic demand is improving, early employment data (for January) were encouraging and the low exchange rate with the U.S. dollar is giving a boost to trade performance," he explained.

On March 31st, a preliminary statistics from ISTAT actually showed unemployment increased again in February to 12.7 percent from 12.6 percent in January.

Still, the indexes for business and consumer confidence were both on the rise in March, the latter at its highest level since 2008.

"There is optimism about our economy in the current and the next year," the expert confirmed.

These expectations would be justified by two main factors. Firstly, positive effects are expected from the bond-buying program of the European Central Bank (ECB), the so-called Quantitative Easing (QE); secondly, the low energy prices would likely boost Italian exports and production.

"The QE will relax the pressure on Italy's public finances in terms of debt repayment. Some early estimates indicate the lower interest rate connected with the ECB asset purchases may free between 5 billion and 10 billion euros of resources," Esposito said.

The QE program would also reduce the pressure on the country's financial system.

"The injection of liquidity is expected to increase the supply of credit to the real economy, although our financial system still suffer from some backwardness. Finally, the effect of the QE on the exchange rate is giving a boost to the export performance as the latest data show," Esposito said.

On the other hand, the current low energy prices would give an additional stimulus to Italy's production thanks to a reduction in the costs of inputs.

"This is likely to increase the competitiveness of our exports as well, since Italy depends more on external energy sources than the rest of Europe".

These favorable conditions in the global economy would combine with domestic factors: a positive outcome expected from the on-going reform process in Italy, especially from a labor market reform; and a boost to domestic demand likely resulting from two major events such as the EXPO Milan 2015 starting in May; and the Jubilee opening in Rome few months later.

"These factors combined will surely improve Italy's growth prospects," the economist said.

Yet, he also warned of the obstacles still present on the path to recovery, most of which are connected with the government's ability to implement reforms improving structural competitiveness.

"I especially refer to the historical problems affecting Italy: the slow justice system, the excess of red tape, and the slowness in implementing ICT and other new technologies," he said.

The LUISS expert seemed also optimist with respect to Italy-China economic relations, despite an over-3.5-billion-euro deficit in the trade balance Italy showed in January-February 2015, according to ISTAT data.

"The net data is the result of a 7.7 percent contraction in Italy's exports towards China and a strong 13 percent increase in imports," Esposito explained.

"The latter is connected with the Italian domestic demand beginning to recover, since most imports from China are semi-durables consumer goods, especially electronic ones, and raw and intermediate goods from the mechanical industry".

Overall, the analyst believed the 2015 would be "a year of change for economic relations between China and Italy" and, seemingly, a positive one.

"The strongest interest China shows towards Italy in terms of investments is connected with an expected increase in the demand for 'made in Italy' products," he explained.

"This is due both to the increasing purchasing power of Chinese consumers, and to the willingness of Italian firms to increase their penetration in the Chinese market."

According to independent estimates, the increase in the Chinese demand for "made in Italy" will be worth some 14 billion euros in 2015, the expert said. (1 euro = 1.07 U.S. dollars) Endite