Italy's planned fiscal stimulus program could send it on a path toward recession with high debt and low growth imperiling an already heavily burdened economy, the International Monetary Fund warned in a new report.
"Real personal incomes are at the level of two decades ago; unemployment has averaged close to 10% over this period; the living standards of middle-aged and younger generations have eroded; and emigration of Italian citizens is near a five-decade high," the IMF said in a preliminary staff report issued Nov. 13.
The report comes with Italy and the EU locked in a standoff over the country's budget, which the EU has rejected because the bloc claims Italy is overstepping the eurozone's fiscal guidelines. At the same time, the country's debt burden remains among the highest in Europe.
However, Italian Prime Minister Giuseppe Conte's office said Nov. 13 that the populist government will stick to its deficit target and growth forecast next year, defying the bloc's demands for a revised budget. The government is due to deliver a reply to the EU by Nov. 13.
Italy's recently formed populist government is looking for a stimulus package of tax cuts and social welfare plans to jumpstart the economy, with a deficit target of 2.4% of GDP and a growth forecast of 1.5% in 2019.
"Reports suggest that Italy will revise its growth forecasts down slightly but will keep its deficit targets unchanged," Brown Brothers Harriman currency analysts wrote in a Nov. 13 note. "It still looks like tensions are likely to get worse and the possibility of sanctions on Italy is rising. Italy's 10-year spread to Germany is moving higher to 312 basis points, the highest since October 24."
While the IMF said Italy's focus on growth and social inclusion was welcome, it also said that the planned stimulus would keep public debt at 130% of GDP over the next three years.
"Beyond that, additional fiscal adjustment will be needed just to stabilize debt, under our projections of rising interest rates during monetary policy normalization and increasing pension spending," the IMF said, noting that slowing growth or rising spreads could force Italy to pull back on fiscal stimulus, just as the economy weakens.
"This could transform a slowdown into a recession," the IMF said.
Italy's banking system has been strengthened substantially, with gross nonperforming loans decreasing from a 2015 peak of 17% to about 10% by mid-2018, the IMF report noted. However, the fund added that rising yields would pose risks, especially for the weaker banks.
