US embassy cable - 02ROME462

UNCLAS SECTION 01 OF 08 ROME 000462 
 
SIPDIS 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
LABOR FOR ILAB 
PARIS ALSO FOR USOECD 
TREAS FOR OASIA HARLOW, JONES 
                       UNCLASSIFIED 
 
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STATE PASS CEA 
STATE PASS FRB FOR GUST 
FRANKFURT FOR MCCOWN 
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 
4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ELAB, IT, KPRP 
SUBJECT: ECONOMIC FORECAST FOR ITALY 2002-2003: JANUARY 
2002 PREDICTIONS 
 
REF: (A) 01 TREAS 172000Z, (B) 01 ROME 52279 (C) 01 ROME 
 
5549 
 
1. SUMMARY. ITALY'S ALREADY WEAK ECONOMY WILL REGISTER AN 
ANEMIC GDP GROWTH RATE OF ONE PERCENT IN 2002, WITH A 
MODERATE ECONOMIC RECOVERY EXPECTED ONLY IN THE SECOND HALF 
OF THE YEAR.  IN 2003, GDP GROWTH IS EXPECTED TO CLIMB 
ABOVE TWO PERCENT. INVESTMENT WILL PROMPT THE VERY MODEST 
GROWTH IN 2002, WHILE THE 2003 GROWTH WILL BE SUPPORTED BY 
EXPORTS AND A GRADUAL ACCELERATION IN GROWTH OF HOUSEHOLD 
CONSUMPTION, AS WELL AS AN IMPROVED GLOBAL ECONOMIC 
PICTURE. INFLATION IS EXPECTED TO SLOW OVER THE FORECAST 
PERIOD, ALTHOUGH THE EURO CHANGEOVER AND AN UNUSUALLY COLD 
WINTER WILL PUSH INFLATION SLIGHTLY HIGHER IN THE FIRST 
QUARTER OF THIS YEAR. ONE-TIME MEASURES PROPOSED TO REDUCE 
THE DEFICIT WILL FALL SHORT OF THE GOIS OPTIMISTIC 
PREDICTIONS. CRITICAL STRUCTURAL REFORMS WILL NOT TAKE 
PLACE IN 2002, MAKING IT DIFFICULT FOR THE GOI TO MEET 
BUDGET DEFICIT TARGETS FOR 2002. END SUMMARY. 
 
                       UNCLASSIFIED 
 
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GDP GROWTH 
---------- 
 
2.  IN THE AFTERMATH OF SEPTEMBER 11 AND THE GLOBAL 
ECONOMYS TAILSPIN, ITALY, LIKE THE REST OF THE EU, SAW ITS 
ECONOMY STUMBLE BADLY. FOURTH QUARTER 2001 RESULTS, 
ALTHOUGH STILL TRICKLING IN, ARE SHOWING ZERO PERCENT OR 
EVEN A NEGATIVE GDP GROWTH RATE. THESE RESULTS MORE THAN 
OFFSET THE STRONG PERFORMANCE OF THE FIRST QUARTER, WHEN 
GDP ROSE AT AN ANNUALIZED RATE OF MORE THAN 3 PERCENT. WE 
EXPECT THAT FINAL FIGURES WILL SHOW A GROWTH RATE OF 1.8 
PERCENT. AVERAGE EURO-ZONE GROWTH IN 2001 IS EXPECTED TO 
HAVE BEEN 1.5 PERCENT.  FOR ITALY, THIS IS A SILVER LINING 
IN AN OTHERWISE BLEAK PICTURE. 
 
3.  FOR MOST OF THE 1990S AND INCLUDING 2000, ITALY HAS HAD 
A SLOWER GROWTH RATE THAN THE AVERAGE OF EURO-ZONE 
ECONOMIES. THE GOI STILL OFFICIALLY FORECASTS THAT GDP 
GROWTH IN 2001 WILL RANGE FROM 1.9 PERCENT TO TWO PERCENT. 
 
4. THE ACROSS-THE-BOARD WEAK FOURTH QUARTER PERFORMANCE, 
FROM INDUSTRIAL PRODUCTION TO HOUSEHOLD CONSUMPTION, WILL 
REVERBERATE FOR MONTHS.  GDP GROWTH FOR 2002 IS EXPECTED TO 
BE AN ANEMIC ONE PERCENT, ACCORDING TO THE CONSENSUS 
FORECAST OF ITALIAN RESEARCH INSTITUTIONS.  THE OECD IN ITS 
ANNUAL REPORT PREDICTS A GDP GROWTH RATE OF 1.2 PERCENT. IN 
CONTRAST, THE GOI PREDICTS 2.3 PERCENT GDP GROWTH. 
 
5. WE CONCUR WITH LEADING THINK-TANKS THAT THE GOIS 
PREDICTION IS TOO OPTIMISTIC.  THE GLOBAL ECONOMY IS NOT 
EXPECTED TO BEGIN TO REBOUND UNTIL THE SECOND HALF OF THIS 
                       UNCLASSIFIED 
 
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YEAR, WHICH WILL CONTINUE TO DEPRESS ITALIAN EXPORTS TO ITS 
MAJOR MARKETS: THE U.S. AND GERMANY.  THE LATTERS MORE 
PROFOUND ECONOMIC WOES ARE BAD NEWS FOR ITALIAN EXPORTERS, 
SINCE GERMANY IS THEIR NUMBER ONE EXPORT MARKET. 
 
6. INVESTMENT WILL CONTINUE AT MODERATE RATES.  THE GOI 
PREDICTS THAT THE TREMONTI LAW, WHICH PROVIDES TAX BENEFITS 
FOR REINVESTED PROFITS, WILL SPUR SIGNIFICANT INVESTMENT IN 
2002, WHICH, IN TURN, WILL PROP UP GDP GROWTH.  WE BELIEVE 
THAT, GIVEN GLOBAL ECONOMIC UNCERTAINTIES, ITALIAN 
COMPANIES WILL MAKE MARKET MOVES CAUTIOUSLY AND POSTPONE 
MAJOR INVESTMENTS. WE EXPECT THAT THE POSITIVE EFFECTS OF 
THE TREMONTI LAW WILL ONLY BEGIN TO BE FELT IN THE LATTER 
HALF OF THE YEAR. THE GOI ALSO EXPECTS AN UPTURN IN 
HOUSEHOLD CONFIDENCE AND CONSUMPTION.  AGAIN, THE CONSENSUS 
IS THAT CONSUMERS ARE ADOPTING A WAIT AND SEE ATTITUDE 
UNTIL THERE ARE SIGNS OF A GLOBAL ECONOMIC RECOVERY. 
ECONOMIC WOES IN REGIONS OUTSIDE OF EUROPE ALSO MAY HAVE A 
BOOMERANG EFFECT.  SOME 200,000 INVESTORS IN ITALY HAVE 
ASSETS, THROUGH MUTUAL FUNDS AND INDIVIDUAL STOCKS, IN 
ARGENTINA. (ACCORDING TO THE LATEST ESTIMATES, ITALIANS 
OVERALL EXPOSURE IN ARGENTINA IS ABOUT E12 BILLION.  TWO 
 
                       UNCLASSIFIED 
 
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 2002ROME00462 - Classification: UNCLASSIFIED