The recession in Italy, which began early this year, is likely to extend through much of 2009, as in many other OECD countries. Global financial turmoil hit an economy already weakened by several years of low productivity growth, deteriorating competitiveness and high public debt, though solid job creation and falling unemployment had been bright spots. Recovering confidence towards the end of 2009 should allow output to accelerate significantly during 2010.
After a substantial reduction in the budget deficit in 2007, the fiscal stance turned somewhat expansionary in 2008. The government’s three-year budget plan for 2009-11 recognises that high public debt and rising risk spreads leave little choice but to resume fiscal consolidation and the cyclically adjusted deficit indeed shrinks in these projections. But under current circumstances, the automatic stabilisers from lower activity should be allowed to operate as the economy weakens. Cuts in public employment foreseen in budget plans should be carefully implemented so as to contribute to improved efficiency as well as fiscal savings.