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World economy gains momentum but Italy is not latching on, IMF says


Alessandro Merli – 

Italy is not latching on to the recovery that is strengthening in the rest of the global economy and in particular in other developed countries, and its growth rates remain below those of the major industrial nations, according to new forecasts from the International Monetary Fund (IMF).

Meanwhile the protectionist risk is emerging on the global horizon, around which IMF director Christine Lagarde has already raised the alarm and sparked controversy with Donald Trump’s administration. The issue will be a potential driver of further tension this week during the G20 and IMF meetings in Washington.

When presenting his forecasts, IMF Chief Economist Maurice Obstfeld said that protectionism and a race to the bottom in financial regulation (another fear concerning the United States’ new line) “would be worse for everybody.”

The Italian economy will grow by 0.8% both this year and next, according to estimates from the “World Economic Outlook,” almost unchanged compared to those of January.

Italian growth is “clearly below potential” IMF economists say, along with a similar situation in France, Portugal, Spain and above all Greece. Unemployment in Italy will fall from 11.7% in 2016 to 11.4% in 2017 and 11% in 2018, but it will remain the highest in the euro zone with the exception of Spain and Greece. The euro area overall will grow by 1.7% this year and 1.6% next year. Political uncertainty caused by upcoming elections is posing risks, among other factors.

Thanks to improvements in the manufacturing and trade sectors, the global economy will reach growth of 3.5% in 2017 and 3.6% in 2018 (after a 3.1% rise in 2016). This will be partly helped by prices of raw materials which have boosted producer countries. Financial markets are optimistic, with the expectation of continuous support from economic policy in China and an expansive fiscal policy and deregulation in the US.

If confidence and the attitude of markets remains strong, according to the document, in the short term growth could surprise on the positive side. In countries in which growth is insufficient, monetary policy has to be accommodative (a reference to the European Central Bank) but it cannot work on its own, the IMF says, underlining once again the need to clean up bank balance sheets, facing the issue of non-performing loans (NPLs), a problem that is particularly acute in Italy, and strengthening the efficiency of banks.

“A critical priority for boosting growth and limiting downside risks in the euro area is to accelerate banks’ balance sheet repair and the resolution of non-performing loans, including through a combination of greater supervisory encouragement, insolvency reform, and the development of distressed debt markets. Completion of the banking union, including by introducing a common deposit insurance program with a common effective fiscal backstop, also remains critical. These actions would strengthen the transmission of monetary policy accommodation to the real economy and facilitate the consolidation and restructuring of the banking sector,” the IMF said in its report.

In the medium term, the IMF believes that downside risks remain for the global economy, due to low growth in productivity and strong income inequalities, which require structural interventions.

But as Lagarde recently mentioned, the IMF is also worried by the fact that protectionist policies could threaten global economic integration and cooperation, which have brought positive effects for the global economy.

The reference to the threats posed by protectionist choices in the US is clear. US Trade Secretary Wilbur Ross has defined Lagarde’s warnings as “rubbish,” choosing instead to point the finger at trade surpluses in China, Japan and Europe. At the G20 in Baden Baden last month, Treasury Secretary Steven Mnuchin, who will meet colleagues again this week in Washington, blocked any reference opposing protectionist measures in the final statement.



by Alessandro Merli – © ITALY EUROPE 24

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