The Italian Economy: Recent Developments and Future Prospects

Taipei, 11 November 2019

Angelo Cicogna

Chief Representative

Banca d’Italia

Tokyo Representative Office

Disclaimer: the views set out in this presentation are the presenter’s own

and do not necessarily reflect the official opinion of the Bank of Italy.

INVEST IN ITALY ROADSHOW

THE ITALIAN ECONOMY: RECENT TRENDS

2

*Government forecast

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2012 2013 2014 2015 2016 2017 2018 2019*

Italy - annual GDP growth rate

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

21

21.2

21.4

21.6

21.8

22

22.2

22.4

22.6

22.8

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Italy - total employment and unemployment (mln persons; %)

EMPLOYMENT (mln persons) UNEMPLOYMENT RATE (r.h.s.)

….notably sustaining the continued improvement in labor market conditions

Italy’s economic recovery has extended into

2019….

THE ITALIAN ECONOMY: RECENT TRENDS

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3

Gross Domestic Product (Euro area and Italy)

Euro area quarterly growth rate (annualized) Italy quarterly growth rate (annualized)

Euro area yoy% Italy yoy%

Source: IMF estimates and projections, WEO 2019/10

The global slowdown…

...has weighed on recent growth in the Euro Area and in Italy….

-1.0

0.0

1.0

2.0

3.0

4.0

5.0Inflation in Euro Area and Italy

(monthly data; annual rate of change)

Euro area (all items) Italy (all items)

…keeping inflation well below

target

3

0

1

2

3

4

5

World Advanced economies Emerging market and developingeconomies

GDP (annual % growth)

2016 2017 2018 2019 2018 forecast for 2019

THE ITALIAN ECONOMY: SHORT TERM OUTLOOK

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2012 2013 2014 2015 2016 2017 2018 2019* 2020*

Italy - annual GDP growth rate (historical data and short-term projections)

* Government projections

While the external environment remains challenging, growth is expected to pick up in 2020…

4

THE ITALIAN ECONOMY: SHORT TERM OUTLOOK

….recently further enhanced through a number of additional stimulus

measures:

cut of interest rate on deposit facility (-0.4%→-0,5%), with “tiering”

restart of Asset Purchase Programme (€ 20 bln. monthly)

new set of 7 quarterly TLTROs (TLTRO III), with rates as low as the

deposit facility’s, and maturity extended to 3 years

reinforced forward guidance

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

5000000

201

9W4

2

201

9W2

1

201

8W5

2

201

8W3

1

201

8W1

0

201

7W4

1

201

7W2

0

201

6W5

1

201

6W3

0

201

6W0

9

201

5W4

1

201

5W2

0

201

4W5

1

201

4W3

0

201

4W0

9

201

3W4

0

201

3W1

9

201

2W5

0

201

2W2

9

201

2W0

8

201

1W3

9

201

1W1

8

201

0W4

9

201

0W2

8

201

0W0

7

200

9W3

9

200

9W1

8

200

8W4

9

200

8W2

8

200

8W0

7

200

7W3

8

200

7W1

7

Eurosystem total assets (mln euros)

-1

0

1

2

3

4

5

6

7/8

/20

08

4/8

/20

09

1/8

/20

10

10/

8/2

010

7/8

/20

11

4/8

/20

12

1/8

/20

13

10/

8/2

013

7/8

/20

14

4/8

/20

15

1/8

/20

16

10/

8/2

016

7/8

/20

17

4/8

/20

18

1/8

/20

19

10/

8/2

019

ECB Policy Rates

Deposit facility Marginal lending facility Main refinancing operations

….benefiting from strong monetary support provided by the Eurosystem…

5

THE ITALIAN ECONOMY: SHORT TERM OUTLOOK

0

0.5

1

1.5

2

2.5

3

3.5

4

Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

De

c-1

8

Jan

-19

Feb

-19

Mar

-19

Ap

r-1

9

May

-19

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

Italy's 10yr government bond yield: level & spread over Germany's

(daily data; per cent)

IT 10yr govt bond yield

Italy-Germany 10yr govt bond yield spread

… as well as from the significant improvement in financial

conditions….

00.10.20.30.40.50.60.70.80.9

11.11.21.31.41.51.61.71.81.9

22.12.2

2018 2019 2020* 2021* 2022*

General Government Structural Primary Balance (% of potential GDP)

Source: Italian government estimates and budget plans

* Government budget plans

…..and from a moderately expansionary fiscal policy stance

6

STRONGER FUNDAMENTALS SUPPORT MEDIUM TERM PROSPECTS

-5

-3

-1

1

3

5

7

9

11

1999-2007 2007-2010 2010-2018

Volume of Italy’s goods export and potential demand (average yearly growth rates, %)

Exports Potential demand Gap (Exports - Potential demand)

Improved competitiveness…

75

80

85

90

95

100

105

110

115

120

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20182019

Italian exports (2008Q1=100)

7

STRONGER FUNDAMENTALS SUPPORT MEDIUM TERM PROSPECTS

Cyclically adjusted current account balance

-24

-18

-12

-6

0

6

12

18

24

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2007 2009 2011 2013 2015 2017 2019Q2

Current account and International Investment Position (% of GDP)

IIP (right-hand scale) CURRENT ACCOUNT BALANCE

GOODS BALANCE

…underpins solid external position

8

9

STRONGER FUNDAMENTALS SUPPORT MEDIUM TERM PROSPECTS

34.0

36.0

38.0

40.0

42.0

44.0

46.0

48.0

50.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Leverage dynamics: debt, equity and prices (per cent)

Contribution of equity (flows) Contribution of equity (price)

Contribution of financial debt leverage (r.h.s.)

adjusted leverage (r.h.s.)

Business sector’s financial resilience has improved through deleveraging…

…and diversification of sources of financing

STRONGER FUNDAMENTALS SUPPORT MEDIUM TERM PROSPECTS

of which: IPOs 2013-

2018

Non financial corporations listed on the Italian stock exchange

10

STRONGER FUNDAMENTALS SUPPORT MEDIUM TERM PROSPECTS

Sources: Bank of Italy and Istat for Italy, ECB for euro-area countries, Office for National Statistics and Bank of England for the United Kingdom, Federal Reserve System - Board of Governors and Bureau of Economic

Analysis for the United States.

Households financial debt

(per cent of gross disposable income)

Household financial conditions remain healthy

11

STRONGER FUNDAMENTALS SUPPORT MEDIUM TERM PROSPECTS

System’s financial soundness sustained by increased capital base

6

7

8

9

10

11

12

13

14

15

Jun

-09

De

c-0

9

Jun

-10

De

c-1

0

Jun

-11

De

c-1

1

Jun

-12

De

c-1

2

Jun

-13

De

c-1

3

Jun

-14

De

c-1

4

Jun

-15

De

c-1

5

Jun

-16

De

c-1

6

Jun

-17

De

c-1

7

Jun

-18

De

c-1

8

Italian banks’ capital ratio (Common Equity Tier 1 Ratio - %)

Italy’s banking sector is solid (1)

12

STRONGER FUNDAMENTALS SUPPORT MEDIUM TERM PROSPECTS

Flows of new NPLs back to pre-crisis standards

Reduction of legacy NPLs stock has accelerated…

New non-performing loan rate (%)

Gross and net non-performing loans

(% of total loans)

Italy’s banking sector is solid (2)

Quality of loans portfolio steadily improving…

13

STRONGER FUNDAMENTALS SUPPORT MEDIUM TERM PROSPECTS

…sustaining increased profitability…

Return on equity

(main European banks; 2019 Q2)

Cost to income ratio

(main European banks; 2019 Q2)

Italy’s banking sector is solid (3)

14

…reflected in this year’s positive stock market performance of Italian banks

STRONGER FUNDAMENTALS SUPPORT MEDIUM TERM PROSPECTS

80

85

90

95

100

105

110

115

120

125

130

20

19

01

20

19

02

20

19

03

20

19

04

20

19

05

20

19

06

20

19

07

20

19

08

20

19

09

20

19

10

20

19

11

Equity market indices (1/1/2019 = 100)

ITALIAN BANKS

EURO AREA BANKS

Italy’s banking sector is solid (4)

15

STRONGER FUNDAMENTALS SUPPORT MEDIUM TERM PROSPECTS

60

70

80

90

100

110

120

130

140

150

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* 2020* 2021* 2022*

Main public finance indicators (Historical data and government projections, % of GDP)

Primary balance Interest on debt Budget balance Debt (right-hand scale)

* Government projections and budget plans

Public finance management remains geared towards gradual debt reduction…

16

STRONGER FUNDAMENTALS SUPPORT MEDIUM TERM PROSPECTS

….which will be facilitated by a continuation of currently favorable refinancing conditions

17

STRONGER FUNDAMENTALS SUPPORT MEDIUM TERM PROSPECTS

Reforms introduced in public pension system to cope with future demographic headwinds contribute to Government finances’ long-term sustainability

The S2 sustainability indicator and its components

S2: Required increase in primary balance needed to stabilize debt to GDP ratio over an infinite horizon.

Source: Fiscal Sustainability Report 2018

18

Thank you