BusinessWeek: January 10, 2000

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 Business Outlook: Italy

Italy: A Latecomer Joins the Party

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Italy: A Latecomer Joins the Party

CHART: Better Growth in a Euro-Zone Laggard


Italy's economy, the euro zone's laggard for four years, is finally kicking into a higher gear, but don't expect a boom. So far, the upturn is export-led, with domestic spending still depressed.

That was the word from Italy's third-quarter report on gross domestic product, which grew a stronger-than-expected 0.9% from the second quarter, the fastest pace in more than two years. The showing means that 1999 growth may reach the government's 1.3% target. Analysts generally project 2000 growth at a little more than 2%, which would trail the 2.8% pace expected for the entire euro bloc.

Powered by a global recovery and a competitive euro, third-quarter exports jumped 3.8%, the best gain in two years. Exports account for about a quarter of GDP. Stronger foreign demand is fueling a pickup in manufacturing, and, as a result, business investment, especially in machinery, advanced by 1.5%.

However, consumer spending edged up only 0.3% in the quarter. Modest wage growth and some fiscal drag left over from past belt-tightening are limiting income growth. Those drags will continue in 2000, but somewhat stronger job gains and past steep cuts in interest rates prior to the euro's introduction will support household spending.

Already, credit growth is picking up sharply, and construction is recovering from a long slump. Recently, consumer confidence has picked up, as Italy's unemployment rate in October fell to 11%, the lowest level in more than five years. Moreover, October retail sales, up 3.1% from a year ago, exceeded analysts' expectations.

Reflecting a sluggish domestic demand, the inflation outlook is benign, despite the continued tendency of Italian inflation to run slightly higher than the 1.6% euro zone rate. Deregulation, especially in telecommunications and energy, is helping to hold back prices. Moreover, the 1999 slowdown in wage growth will limit price growth in 2000, and the continued rebound in economic growth will further restrain unit labor costs, as productivity picks up.

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