The Italian National Statistics Office (ISTAT) is in the process of revisising its methodology for measuring movements in GDP and it's components. The procedures involved are fairly technical (and are explained by ISTAT here) and are intended to harmonise Italian GDP statistics (esepcially as regards the price deflator applied to international trade transactions) with those of other countries in the European Union following the adoption of European Council regulation EC 1392/2007 on 13 November 2007 (as described in this very tedious document here). The timing of this change would see to be quite fortuitous, but it does mean that we will have no Q4 2007 data until the next quarterly release (of Q1 2008 on 23 May) since ISTAT do not have the compatible data to hand. As I say, this is probably fortuitous, but we will now have to wait till May to know whether or not Italy actually fell into rcession in the last quarter (if it didn't have actual negative growth it must have been a pretty close shave, as the string of recent downward revisions indicate), and clearly with elections looming you can read this whatever way you want to.
So for the moment we are left watching and waiting and guessing. Istat did, however, release the 2007 growth rate base on the new methodology last Friday, and it came in at 1.5%, a level which was lower than previously forecast, As a result of applying the new methodology ISTAT also revised Italy's GDP growth in 2006 down to 1.8% from 1.9%, while the 2005 figure was revised up to 0.6% from 0.1%.
As was expected there was reasonably positive news on the fiscal front, and Italy's budget deficit declined to 1.9% of GDP last year from a downwardly-revised 3.4% of GDP in 2006. The figure marked the first time the deficit was below the European Union's ceiling of 3.0% of GDP since 2002, and was also below expectations. Finance Minister Padoa-Schioppa said the reduced budget deficit was satisfying, as was the increase in the primary surplus - the budget balance before counting interest payments on national debt - to 3.1% of GDP from 1.3% the year before.
Italy was committed to reducing the budget deficit to 2.8%, and last summer forecast a reduction to 2.4%. It has pledged to balance its budget by 2011, a year later than most euro-zone members.
On the other hand Italy's overall fiscal burden rose last year, to 43.3% of GDP, the highest level since 1997, from 42.1% the year before. Padoa-Schioppa called the increase "limited" and said it reflected increased receipts from a crackdown on tax evasion rather than higher tax levies in general. This latter point is debateable since there have been tax increases, and primary spending rose by 3.6% on the year.
With this growing structural burden in mind, and no reforms which substantially alter the underlying dynamic in sight, slowing growth following two reasonably strong years obviously now starts to put the whole fiscal adjustment process in doubt. Italy has already put back the objective of achieving a balanced budget by one year - to 2011, as compared to the 2010 deadline being adhered to by most member states and more slippages here unfortunately now look even more likely. In addition, with both major party groups in the election promising tax relief if elected it is hard to see how the books can be made to balance.
As previously covered on this blog, the European Commission this month halved its Italian economic growth forecast for 2008 to 0.7%, down from a forecast of 1.4% made in November, predicting exports will suffer as a result of the strong euro and the global slowdown, while consumer spending will slow due to higher prices.