Italy May Hang Budget on Unrealistic Growth Estimates

(Bloomberg) -- The controversial budget plans of Italy’s populist government are hanging on an economic premise that looks too optimistic.

A week after releasing an initial deficit target, the coalition finally unveiled the figures underpinning that aim. It sees growth of 1.5 percent in 2019, followed by 1.6 percent and 1.4 percent in subsequent years. By comparison, the median in Bloomberg’s latest survey is for expansion of no more than 1.2 percent.

Next year’s growth under current legislation, or net of the measures included in the 2019 budget, would be limited to 0.9 percent, down from 1.2 percent projected for 2018, the Treasury said in its update to the Economic and Financial Document forming the basis for the budget that it published late Thursday.

Italy May Hang Budget on Unrealistic Growth Estimates

“Whilst government forecasts always fall on the optimistic side, this particular assumption hints at significant fiscal slippage risk ahead in case of an economic slowdown,” said Axel Botte, a strategist at Ostrum Asset Management.

On the deficit, the coalition sees 2.4 percent of GDP in 2019, narrowing to 2.1 percent and then 1.8 percent. The 2020 and 2021 figures are lower than initially reported, a concession to investors and EU critics. Under the plans, the debt ratio will decline to 126.7 percent in 2020 from 130.9 percent this year.

Italy’s 10-year yields rose four basis points to 3.37 percent as of 10:47 a.m. in Rome, pushing the yield premium on the nation’s bonds over those of German bunds to 281 basis points. The nation’s benchmark FTSEMIB stock index fell 0.9 percent.

Deputy Prime Minister Matteo Salvini said Friday the European Union has approved economic measures that have impoverished his country and “ruined Europe and Italy.”

Read more: Italy’s full macroeconomic forecasts 2019-2021

Italy May Hang Budget on Unrealistic Growth Estimates

The “growth targets are ambitious, but not unrealistic and could be exceeded for at least two reasons,” Finance Minister Giovanni Tria said in the foreword to the report including the new estimates and targets. The finance chief mentioned the impact of planned investments and the elimination of legal and bureaucratic obstacles to their full implementation as well as a gradual reduction of public debt financing costs after tensions on financial markets subside.

Still, in the document posted on its website Thursday, the Treasury included a rise in the structural-deficit target, or net of the effects of the economic cycle and of one-time measures, to 1.7 percent of output in each of the next three years. That is up from the 0.9 percent estimated for this year. The figure is considered key by the European Commission in its assessment of the member countries’ budget plans.

In an interview with Bloomberg News in July, Tria said that his aim was not to worsen the structural-budget situation and possibly to improve it.

The Five Star-League coalition says its program will help increase jobs, demand and overall expansion, but the economic outlook may not sit well with investors and the European Union. Both have already balked at the budget proposals, with the former pushing 10-year yields back above 3 percent and the latter saying Italy is “jaywalking” when it comes to fiscal rules.

Heightening the risk, growth is showing signs of a slowdown across the 28-nation European Union, already unnerved by trade wars. The looming budget standoff between Brussels and Rome led Commission President Jean-Claude Juncker to warn against a repeat of the Greek crisis.

In a statement on Thursday evening, Tria said he hopes the talks with EU will be “open and constructive.”

The fiscal outline is “responsible and brave, and it seeks to focus on growth and citizens’ well-being, also ensuring a decline in the deficit profile,” he said.

There is cause for broader concern, with the situation inflamed by reports of infighting within the administration, delays in publishing all the key numbers, and comments that seemed to question Italy’s commitment to the euro currency.

Salvini said Wednesday that debt will decline “because more people will go back to work.” But short-term fiscal stimulus won’t solve longer-term issues that have left Italy as the slowest-growing economy in the euro area.

“The reality is that Italy’s problems are not about whether it meets its budget deficit next year or the year after,” Talib Sheikh of Jupiter Asset Management told Bloomberg Television. “It’s about can they undergo some deep-seated structural change. Italy’s ultimate problem is a lack of structural growth and it’s not clear to me that many of the populist agendas make any step toward that.”

European Central Bank President Mario Draghi may have discussed the Italian government’s “undervaluation” of the current context in terms of budget’s effect on markets in a Wednesday meeting with President Sergio Mattarella, La Stampa reported on Friday. Draghi may have warned about the Italian budget and the trend of the bond yield spread in the context of the winding down of the ECB’s quantitative-easing program, the newspaper said.

©2018 Bloomberg L.P.