Bank of Italy Governor Ignazio Visco on Saturday predicted that the eurozone’s third-largest economy would see a return to growth next year, but confirmed forecasts that this year would be a “year of recession.”
He also described Italian banks as being sound in terms of having adequate capital, but cautioned that the outlook for profit recovery this year was not good.
Visco became central bank governor last autumn after former governor Mario Draghi was appointed European Central Bank president.
His speech, at a financial forum in Parma, followed by a few days the release of data by the Italian National Institute for Statistics finding that Italy’s economy slid into recession in the last quarter of last year.
“This year will be a year of recession,” Visco said. “As we indicated in the forecasting scenarios set out in our Economic Bulletin in January, we expect a year-on-year decline in GDP of about 1.5 percent.”
However, he stressed that “it is important to look ahead, to act in such a way that as conditions in the financial and credit markets return to normal, it will be possible to stabilize economic activity in Italy already by the second half of 2012 and return to growth next year.”
Even though Italy’s last two quarters saw decline, the nation’s economy overall for last year still managed to grow, but by an anemic 0.4 percent.
Italian Prime Minister Mario Monti, who took up the post in November last year, has been trying to keep Italy from becoming the latest victim of Europe’s sovereign debt crisis. He is pressing ahead with a formula of spending cuts and structural reform with the aim of spurring growth.
Visco described Italian banks as being sound, despite being hard hit by the debt crisis. However, he acknowledged that their profitability has not made a strong rebound, given a sharp decline in their profits following the 2009 financial crisis and recession.
“In contrast with what happened in the other main European countries, the recovery in 2010 and 2011 was modest, and the outlook for this year is not good,” the central bank chief said.
Although Italy’s borrowing costs have significantly declined since Monti took office, they are still high when compared to rates in the first half of last year, Visco noted. He added that “the difficulty in resolving the Greek crisis, evident again in recent days, is transmitting turbulence to the entire European market.”
“Investor uncertainty over Italian government securities has eased with respect to the worst moments of the crisis, but has not disappeared. The markets’ attention is now focused on Italy’s ability to make further determined progress in the restoration of its public finances and simultaneously stimulate its economic growth potential through structural reforms,” Visco said.
Monti managed to quickly push through ambitious pension reform, to rein in the billowing cost of Italy’s generous system for retirees, especially given its aging population.
He has so far failed to convince the leaders of Italy’s powerful unions to accept labor reforms, including measures to make it easier to fire workers, but Monti has vowed to forge ahead with the labor measures even if union leaders refuse to budge.