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Italy After falling sharply in 2020, GDP is projected to expand by 4.3% in 2021 and 3.2% in 2022. Lockdowns and uncertainty are weighing on activity, although government support has mitigated the effects on firms and households. Substantial job creation, especially for the low-skilled, women and youth, will return only in 2022, when an effective vaccine is expected to have been deployed widely, stimulating consumption, and easing precautionary saving. Investment and exports are expected to recover gradually alongside the manufacturing sector. Supportive fiscal policy is resulting in rising public debt levels, but interest rates are projected to remain low. Higher growth is needed to improve the fiscal position in the medium term. The government’s adjusted budget envisages faster, greener, digitalised and more inclusive growth. Stimulus must be accompanied by continued structural reforms and their effective implementation. The regulatory regime can be simplified, delays in the courts system addressed and worker training outcomes improved. Tax, procurement and spending policy reforms can complement efforts to raise public infrastructure spending capacity. With financial, bankruptcy and competition reforms, these public sector reforms would support the expansion of new and small businesses, raise productivity and reduce informality and persistent inequality. Italy 1 Industrial production in Q3 was close to pre-crisis levels

Permanent positions were well supported through the crisis

Industrial production excluding construction

Absolute change in number of employed aged 15 and over

Index Dec 2019 = 100, s.a. 110 Italy

France

Germany

Spain

Thousand 400

100

200

90 0 80

Temporary employees Permanent employees

-400

60 50 Jan-20

-200

Self-employed

Mar-20

May-20

Jul-20

0 Sep-20

Dec. 2019 - Jun. 2020

Jun. 2020 - Sep. 2020

-600

Source: OECD Main Economic Indicators database; and ISTAT. StatLink 2 https://doi.org/10.1787/888934218862

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020

196 ď ź

Italy: Demand, output and prices 2017

2018

Current prices EUR billion

Italy GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1

1 738.4 1 046.1 327.0 304.1 1 677.2 11.5 1 688.7 535.9 486.2 49.7

Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2

_ _ _ _ _ _ _

General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2020

2021

2022

Percentage changes, volume (2015 prices)

0.8 1.0 0.2 2.9 1.2 0.0 1.2 1.6 2.9 -0.3

0.3 0.5 -0.2 1.6 0.5 -0.7 -0.2 1.3 -0.4 0.5

-9.1 -9.2 2.1 -14.6 -8.0 0.1 -7.9 -17.8 -15.0 -1.4

4.3 4.9 1.0 4.3 3.9 0.0 4.0 5.4 4.2 0.4

3.2 2.3 -0.3 9.5 3.0 0.0 3.1 6.6 6.6 0.2

1.0 1.2

0.7 0.6

1.2 -0.1

0.9 0.4

1.2 0.8

_ _

Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP)

2019

0.6 0.5 0.6 0.6 0.8 10.6 9.9 9.4 11.0 10.9 2.6 2.5 10.2 7.1 5.6 -2.2 -1.6 -10.7 -6.9 -4.4 147.8 155.8 178.7 178.3 177.3 134.5 134.7 159.8 158.3 158.2 2.5 3.0 2.8 3.0 3.1

1. Contributions to changes in real GDP, actual amount in the first column. 2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco. Source: OECD Economic Outlook 108 database.

StatLink 2 https://doi.org/10.1787/888934218881

Italy 2 Confidence in services sectors remains well below pre-crisis levels

Growth recovers gradually

Changes between October 2020 and December 2019

Real GDP

% changes 10

Index 2019Q4 = 100, s.a. 105 100

95 -10 90 Italy

-20

OECD

-30 -40

Construction Manufacturing

Services

Tourism

2019

2020

2021

2022

Source: ISTAT; and OECD Economic Outlook 108 database. StatLink 2 https://doi.org/10.1787/888934218900

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION ÂŠ OECD 2020

 197

New national COVID-19 restrictions complemented with stricter local regulations COVID-19 infection rates rose sharply from mid-October, with infection hotspots geographically dispersed and the national state of emergency extended into 2021. The country imposed a three-tier, regionally-based, system of controls that increases in intensity alongside pandemic threat levels. The controls focus on reducing social interactions, whilst allowing economic activity and schooling to continue as far as possible. Additional support of approximately EUR 10 billion has been announced in a series of three packages to help firms and workers affected by the new restrictions. Some of this will be funded by savings from the earlier COVID-19 support package, as well as by budget reallocations.

Rising infections have curtailed the sharp rebound in activity The rise in infections, restrictions on activity and uncertainty have halted the sharp recovery in activity in the third quarter. Generous liquidity support has helped firms, with COVID-19-related guarantees and bank repayment moratoria extended to over EUR 300 billion in loans. Industrial, construction and retail sales activity recovered in the third quarter, reaching levels close to those in December 2019. Short-time work support helped protect against job losses. Job creation returned in the third quarter, but did not rebound as quickly as activity, weighing on consumption. Young workers, who are more likely to be on temporary contracts, women and the self-employed have suffered most from the deterioration in the labour market. Confidence has improved, but ongoing outbreaks reduce the potential for a fast rebound in 2021. Business confidence in the services sector, particularly tourism, has recovered more slowly than in the manufacturing sector. Precautionary saving rates remain elevated.

Extensive fiscal support is helping to cushion the impact of the crisis The government’s fiscal support totals around EUR 100 billion (6% of GDP), after the support package in the summer added a further EUR 25 billion to earlier initiatives, and measures announced in November targeted sectors hardest hit by new restrictions. Most of this spending is expected to take place in 2020, and relies extensively on existing instruments. Substantial measures to protect households include wage support, childcare allowances, extended leave, loan deferrals (in particular for first time homebuyers), as well as the deferral of tax payments. Firms have received liquidity support with grants to specific sectors, tax deferrals, social security contribution holidays and loan guarantees for new and existing loans, including small and medium-enterprises and exporters. The measures have mitigated potential business closures and job losses. The extraordinary packages to support incomes of workers, the ban on firing workers and easier terms to extend fixed-term contracts will continue into 2021. The adjusted budget for 2021-2023 proposed further fiscal support for households and firms in 2021 that, whilst less generous than 2020 levels, is more targeted. The level of support is likely to increase should restrictions last longer than currently envisaged by the authorities. The adjusted budget also outlines tax reforms to improve efficiency and transparency, to raise employment in southern regions and to reduce the labour tax wedge and provide income support to middle and lower-income workers. In addition, the adjusted budget increases public investment using the EU Recovery and Resilience Facility from the latter half of 2021 to support greener, digitised and more inclusive growth. These proposals could set growth on a sustained higher trajectory if coupled with structural reforms that enable labour and capital to move to the most productive firms, helping narrow the gap between Italy’s most and least productive firms.

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The recovery will be slow and unequal Lockdowns and uncertainty about the pandemic will weigh heavily on activity, investment and employment until general immunisation has been attained. The unemployment rate will pick up during 2021 and remain high in 2022. Consumption growth is projected to recover, but household precautionary saving will remain elevated. Investment is expected to recover in 2022, as public investment rises and firms in more resilient sectors such as manufacturing begin to undertake replacement investment. The services sector, by contrast, will recover more slowly as domestic demand and tourism remain weak until an effective vaccine is widely deployed. This will exacerbate labour market and regional inequalities. Bankruptcies and non-performing loans will rise, as in other countries. Exports recover only partially, reflecting weak global demand, including for tourism. Fiscal support is raising net borrowing in 2020, which will decline in 2022 as growth and revenues recover, and EU Recovery and Resilience projects become more significant. Interest rates are projected to remain low. The pace of growth will have a large bearing on the evolution of government debt ratios, which will remain elevated, at just below 160% of GDP (Maastricht definition). Downside risks to the projections are significant. Delays in public investment spending and a slower recovery in private sector investment would reduce the pace of recovery in 2022. Whilst the banking sector is much stronger than a decade ago and has so far withstood the impact of the crisis, it could be negatively affected by extensive bankruptcies. There are also upside risks to the projection. Effective immunisation against the virus may come faster than anticipated. Households may save less than projected. Export performance may return to pre-pandemic levels if firms take advantage of shifts towards more regional global value chains. Rapid firm adaptation to consumers’ increased use of digital technologies could raise productivity and growth, particularly since prior to the crisis, Italy lagged peer countries. This effect may be especially important in increasing market access for smaller companies. Firms in sectors with relatively low fixed costs and barriers to entry, which are able to quickly begin hiring, could drive a sharper rebound in activity.

Complementing fiscal support with structural reform will sustain higher growth Fiscal policy will need to remain supportive until the recovery is underway. Raising the effectiveness of public administration is critical. Public investments need to be prioritised for their individual and combined impact on growth, jobs and the long-term structure of the economy. Enhanced public employment services and improvements to existing training schemes can mitigate skills mismatch, especially for youth and other vulnerable workers. Judicial reforms, streamlined regulatory frameworks and risk-based enforcement of tax and other regulations can balance the costs and fair execution of the law. Improvements to the composition and complexity of the tax regime, as well as public sector capacity to prioritise and manage infrastructure projects, would raise the growth impact of fiscal policy. Harnessing digitalisation can reduce informality, broaden the tax net and improve targeting for social benefits. Ongoing efforts to strengthen the balance sheet and governance of the banking sector and implement bankruptcy reforms, along with greater competition, would improve the allocation of capital and labour across firms, and improve the resilience of the economy to future shocks. Sustained faster growth would lower public debt levels and interest payments.