Italy: New Prime Minister Letta Faces Massive Task

Consensus Forecasts

Centre-left politician Enrico Letta was last month appointed as Prime Minister, ending the political deadlock following February’s parliamentary elections. Letta’s broad-based coalition government was sworn in on April 28 and he has stated that driving economic growth and repairing the decimated labour market are major priorities. He also favours a loosening of the Euro area austerity imperative. A preliminary estimate of Q1 GDP (released after our survey date) reported a 0.5% (q-o-q) contraction, underscoring the magnitude of the task that Letta faces. Meanwhile, industrial production fell more than anticipated in March, shrinking by 0.8% (m-o-m) after a revised 0.9% drop in February. The unemployment rate remained at 11.5% in March as firms limited hiring amid political uncertainty. Worryingly, the youth unemployment rate climbed to a massive 38.4% in March. While the PMI for manufacturing edged up to 45.5 in April from 44.5 in March, the sector remains firmly in contractionary territory and there was a marked drop in new orders, highlighting the erosion in domestic demand. However, consumer spending could receive a modest boost over the coming months after contractual hourly earnings increased by 1.4% (y-o-y) in March and now look set to outstrip inflation for the first time since June 2010. Consumer prices have tumbled throughout 2013, easing to 1.2% (y-o-y) in April from 1.6% in March, due largely to lower fuel and electricity costs. Our panel has left its 2013 GDP forecast unchanged this month, though.

Meanwhile, the formation of a new government has seen a retreat in 10-year government bond yields, which have fallen in recent weeks.

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