However, recent Italian data has positively surprised analysts: Unemployment has fallen 0.7 percent in the first half of the year, youth unemployment fell to about 35 percent, a services sector index reached its highest level in a decade and three troubled banks have been rescued, easing concerns over the banking sector.
“The recovery is expected to continue, but risks ahead are significant,” the International Monetary Fund (IMF) said at the end of July. The Fund revised upwards its forecasts for Italian growth this year, but warned that the “downside risks are significant.”
These include “political uncertainties, possible setbacks to the reform process, financial fragilities, and re-evaluation of credit risk during monetary policy normalization,” the IMF said.
Erik Jones, professor of International Political Economy at Johns Hopkins University, cited the same reasons driving concerns about Italy.
“There’s a giant amount of non-performing loans (NPLs),” he said. “The economic recovery is taking place but at a really slow pace … (And) there’s political risks in the horizon with the upcoming general election,” he added.
According to figures from the IMF, Italy’s NPL levels stood at 356 billion euros at the end of June of last year, corresponding to 18 percent of total loans for Italian banks, equivalent to 20 percent of Italy’s GDP and one-third of the euro area total for NPLs. The figures have come down since the height of the crisis but they still call for additional measures, the Fund said.
High levels of bad loans constrain banks’ ability to lend and can divert funds away from more productive parts of the economy. This can be a particular problem for an indebted country like Italy. Public debt is seen at 133 percent of GDP this year and at 131.6 percent in 2018, according to IMF forecasts. If the country doesn’t take measures to address this high pile of debt, then Italy could become a bigger problem when the European Central Bank (ECB) begins to raise interest rates, as markets expect.
“At some point in the future the ECB will raise rates, which question the sustainability of Italy’s debt,” Jones from Johns Hopkins told CNBC over the phone.
Higher interest rates will mean higher rates for borrowers across the spectrum in Italy, increasing the chances of any defaults on car loans, bank loans, mortgages, and so on.
The general election, due next year, is another concern looming over Italy.
Opinion polls show that political parties with Euroskeptic views represent the majority of the voting intentions, a chart compiled by Commerzbank showed.
This makes any possible governing coalition unclear, Jones explained.
“Italy has started to grow again in recent years. But the recovery has been too weak to help claw back the ground lost from subpar growth that started well before, and was exacerbated by, the global financial crisis,” the IMF said last month.
The Fund suggested more public investment, better targeting resources to the most vulnerable, lower pension spending, lower tax rates on labor, and bringing more enterprises and persons into the tax net as the next steps forward.