Italy: Country Profile

Country Profile | 04 Nov 2016

Italy will see another year of anaemic growth. Favourable commodity prices and
modest gains in domestic demand provide limited support. A lack of marketliberalising reforms and persistent banking sector-related tensions are drags.
Modest tax cuts and cheap energy prices support consumption. The economy
should gradually strengthen with real GDP growing by 1.2-1.3% per annum by 2020.

KEY POINTS
Italy's economy continues to perform feebly. Real GDP will grow by 0.8% in 2016
- the same rate as in 2015.

Unemployment was 11.9% in 2015 and it will fall to 11.5% in 2016. Long-term
unemployment is nearly 60% of the total. A combination of feeble growth in
productivity, rigidities in the labour market and wage increases keeps labour costs
high and reduces competitiveness.

The economy should gradually strengthen with real GDP growing by 1.2-1.3% per
annum by 2020.

Downside risks include financial volatility and a surge in refugees. Relatively low
nominal growth will make it difficult for Italy to grow out of its crisis legacies and
structural vulnerabilities, leaving it exposed to adverse shocks. A return to precrisis (2007) levels of output may not be realised before the mid-2020s.

Chart 1 Real GDP Growth and Per Capita GDP: 2010-2016

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

Note: Data for 2016 is forecast. GDP per capita are in constant 2015 prices

FACTS

Area
294,100 square kilometres

Currency
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Euro (? = 100 cents)

Location
In the north, Italy meets with France, Switzerland, Austria and Slovenia. In the
south, it divides into two peninsulas, the lower of which almost connects with the
island of Sicily.

Capital
Rome

GOVERNMENT

Head of State
Sergio Mattarella (2015)

Head of Government
Matteo Renzi (2014)

Ruling Party
The Democratic Party leads a coalition with the Civic Choice and Centre Right
parties.

Political Structure
Italy has been a republic since 1946, when it abolished the monarchy. The
president is elected by parliament and 58 regional representatives for a seven-year
term and exercises only semi-executive functions. The prime minister is appointed
by the president. The 630-member Chamber of Deputies (Lower House) is elected
for five years by universal suffrage through a system of proportional representation,
as are all but seven of the 315-member Senate.

Last Elections
Mattarella was elected president by Parliament in January 2015. Parliamentary
elections were held in February 2013. In the Chamber of Deputies (lower house) the
Centre-Left led by Bersani took 341 seats. The Civic Choice led by Monti received
45 seats, the Five Star Movement of Grillo took 108 seats and the Centre-Right led
by Berlusconi garnered 126 seats. In the Senate, the Centre-Left received 117
seats, Civic Choice holds 19 seats, the Five Star Movement took 54 seats, the
Centre-Right won 117 seats and eight seats went to other smaller parties. Renzi
was chosen as prime minister in February 2014.
In June 2011, referendums were held on four separate issues - the privatisation of
water services (two issues), a return to nuclear energy and a decision on whether
the prime minister should continue to enjoy immunity from prosecution while in
office. An overwhelming number of voters rejected all four proposals.

Political Stability and Risks

Italy is thought to have Europe's most rigid labour market. The number of jobless is
the highest in the impoverished south where one person in five is looking for work.
Concerns are also rising that many could miss out on any recovery as the economic
gap between the prosperous north and the impoverished south widens.

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International Issues
The Italian government is concerned about the number of illegal immigrants arriving
from Libya.
Italy has never accepted the claims made by some Austrian groups regarding the
German-speaking South Tyrolean regions in Trentino. However, it does demand
compensation from Slovenia for the dispossession of Italian citizens during the
post-war era.

Government Finance
In 2015, public debt was at ?2,170 billion - equivalent to 133% of GDP - the second
highest in the eurozone after Greece. The real value of public debt rose by 1.5% in
2015. Rome had pledged to reduce the debt-to-GDP ratio in 2016, but with a
weaker economy, that goal will probably not be met.
The budget deficit was 3.0% in 2014. The 2015 deficit was originally set at 2.2% of
GDP but Rome later proposed a new stimulus package valued at ?36 billion. Under
the revised budget, the deficit for 2015 exceeded 3.0% of GDP. After months of
negotiations with the European Commission, Italy secured extra budget flexibility in
the 2016 budget. Officials predict a deficit equal to 2.4% of GDP in 2016 and intend
to hold it at that level in 2017. Rome will see additional pressure on public finances
due to reconstruction costs related to the earthquake in August 2016.
Spending on social security and welfare accounted for 42.1% of all government
expenditure in 2015 followed by spending on general public services (17.8%).
Chart 2 Public Debt: 2010-2015

Source: Euromonitor International

Note: Data are in constant 2015 prices

ECONOMY

Economic Structure and Major Industries

The agricultural sector employs 3.9% of the workforce but is well diversified,
producing soft fruits and vegetables as well as wheat, olives and citrus products for
export. The most fertile areas are in the north. In the south, agriculture is mainly
for subsistence purposes. More than 70% of the country's farms are small and
inefficient.
Manufacturing accounts for 16.7% of GDP and employs 18.9% of the workforce.

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More than 90% of the industrial sector is made up of small and medium-sized firms
that are mainly found in the north-east and the centre of the country. Several
industries, including producers of high tech products, have seen a long-term
decline. Manufacturing value added (in real terms) rose by 1.3% in 2015 but has
been falling in 2016.
The service sector makes up 72.2% of GDP. Consumers' buying habits are changing
as more people turn to discount outlets and lower-priced, non-branded items.
Italy's tourist industry is important though it has lost ground to other destinations.
The real value of tourist receipts rose by 4.3% in 2015 and growth of 1.1% is
expected in 2016. The financial system continues to struggle with the high level of
non-performing loans. The central bank seized control of one bank in 2015 and
launched a ?3.6 billion rescue fund in 2016 to save four regional banks. EU stress
tests in 2016 showed another large bank to be heavily undercapitalised and a ?5
billion recapitalisation plan was approved.

Overview of the Economy

The economy virtually stagnated in 2011 and contracted in each of the next three
years. Meanwhile, the real disposable income of households declined sharply.
Weaknesses in domestic demand were a major problem owing to tight lending
conditions and the on-going process of fiscal consolidation. In 2015, real GDP rose
by a feeble 0.8% but the recovery has struggled to gain traction. Italy's real GDP
had shrunk to levels last seen in the early 2000s.
Italy's economy has seen a decline in potential economic growth as costs have
risen and productivity growth stagnated. These problems are rooted in countryspecific factors. The country is divided into a highly industrialised and developed
northern part, where approximately 75% of the nation's wealth is produced; and a
less-developed, agriculture-dependent south.
The economic gap between Italy's north and south is especially striking. In the
north, thousands of small and medium-sized firms are geared mainly to serve buyers
in Germany. These firms specialise in the manufacture of premium finished products
that are bought by German multinationals for assembling high-end goods that
include everything from cars to washing machines. In contrast, most industry in the
south is controlled and financed by the state. Income in the north is roughly equal
to that in Germany but in Italy's south per capita income is less than that of
Portugal. Unemployment in some parts of the south is as high as 40%.

Foreign Trade
Italy faces increasing competition (in both domestic and international markets) from
Eastern European and Asian suppliers. The country's share of world exports (in
volume terms) has been steadily falling. Hardest hit have been traditional exports
such as textiles, leather and apparel. Exports to markets outside the EU are holding
up better than exports to other members of the single market.
In 2015, exports amounted to 25.3% of GDP. Exports (in dollars) fell by 13.4% in
2015 and gains of 2.4% are forecast for 2016. Italy's export competitiveness
remains weak. Labour costs continue to rise relative to trade partners, pushed up
by slow productivity growth.
Like in most EU countries, a large portion of Italy's exports go to other members of

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the EU. In 2015, 55.3% of all exports went to other EU countries. Germany and
France are the largest export markets. The dominant export sector is machinery
and electrical equipment which accounted for 25.9% of total exports in 2015.
The current account surplus was 2.2% of GDP in 2015 and it will widen to 3.2% in
2016.
Chart 3 Total Foreign Trade: 2010-2016

Source: Euromonitor International from national statistics/OECD/IMF

Note: Data for 2016 is forecast.

Economic Prospects
Real GDP will grow by 0.8% in 2016 - the same pace as in 2015. Favourable
commodity prices and modest gains in domestic demand provide limited support. A
lack of market-liberalising reforms and persistent banking sector-related tensions
are drags. GDP did not change in the second quarter.
The economy's considerable excess capacity eliminates almost all upward pressure
on prices. Inflation stagnated in 2015 and prices will not change in 2016.
Private final consumption (in real terms) edged upward by 1.0% in 2015 and gains
of 1.3% are expected in 2016. Modest tax cuts and cheap energy prices support
consumption. Credit has been tight but restrictions show signs of easing.
The percentage of the workforce that is employed has slowly fallen for the past
several years. Unemployment was 11.9% in 2015 and it will fall to 11.5% in 2016.
Youth unemployment is high and female participation is low. Long-term
unemployment is nearly 60% of the total. A combination of feeble growth in
productivity, rigidities in the labour market and wage increases keeps labour costs
high and reduces competitiveness.
Labour productivity is low owing to a lack of investment in human capital. The
service sector is also the main driver of additional employment and this, too, keeps
productivity low. Finally, Italy lags behind other EU member states in providing highquality education. The proportion of those aged 25-34 that have completed higher
studies is just 21%, compared with an average of 39% for all OECD countries.
Chart 4 Real GDP Growth: 2010-2016

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Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

Note: Data for 2016 are forecast

Evaluation of Market Potential

The economy should gradually strengthen with real GDP growing by 1.2-1.3% per
annum by 2020. Exports should regain some momentum. Gains in real income and
pent-up demand will gradually boost consumer spending. Unemployment will decline
only slowly as discouraged workers return to the workforce. Downside risks include
financial volatility and a surge in refugees. Relatively low nominal growth will make it
difficult for Italy to grow out of its crisis legacies and structural vulnerabilities,
leaving it exposed to adverse shocks. A return to pre-crisis (2007) levels of output
may not be realised before the mid-2020s.
Italy plans to invest ?160 billion in 2015-2020 in the corporate sector and
infrastructure as well as real estate and local and regional government
administration to boost its economic recovery. The goal is to boost growth in the
corporate sector and create jobs.
FDI - though moderately high in the north - is far less than that in the UK, France
and Germany. In the underdeveloped South, FDI is virtually non-existent. To
address the problem, officials plan a package known as "unblock Italy" to boost
investment in infrastructure.
The potential rate of growth will edge downward as population ages. New policies
are needed to boost competition and improve the business climate.

BUSINESS ENVIRONMENT
Italy's tax-to-GDP ratio is among the highest in the EU. Not surprisingly, tax evasion
of all types is estimated to cost the government about ?300 billion each year (15%
of GDP) according to tax authorities. Tax simplification is expected to support
economic activity and strengthen competition. Italy's large informal economy is
thought to deprive the government of at least ?120 billion in unpaid taxes.
Rome has promised a ?5 billion cut in property taxes for primary residences. An
increase in the VAT rate will take place in 2017. A three-year social contribution
exemption for new permanent hires was introduced in 2015. A framework for bank
consolidation has been introduced along with various insolvency reforms. Many
reforms, however, have been grudgingly undertaken, piecemeal and generally failed
to address rigidities.
The judicial system is regarded as unpredictable and slow. The central bank has

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estimated that the costs of the current system are as much as 1% of national
income. Reforms in the judicial system and the public administration are underway.
Table 1 Indicators of Business Environment: 2016
Ease of Doing Business Rank (out of 189)

45

Starting a Business
Time (days)

5.5

Procedures (number)

Dealing with Construction Permits

Time (days)

228

Procedures (number)

10

Getting Electricity
Time (days)

124

Cost (% of income per capita)

209

Registering Property
Time (days)

16

Cost (% of property value)

4.4

Employing Workers
Paid annual leave for a worker with 1 year of tenure (in working days)

26

Tax Rate
Total tax rate (% profit)

64.8

Labour tax and contributions (% of commercial profits)

43.4

Time (hours per year)

269

Payments (number per year)

14

VAT (%)

22

Exporting
Time to export: Border Compliance (hours)

Cost to export: Border Compliance (US$)

Importing
Time to import: Border Compliance (hours)

Cost to import: Border Compliance (US$)

Protecting Minority Investors

Strength of minority investor protection index (0-10)

6.3

Resolving Insolvency
Time (years)

1.8

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Cost (% of estate)

22

Getting Credit
Strength of legal rights index (0-12)

Enforcing Contracts
Time (days)

1,120

Cost (% of claim)

23.1

Source: Euromonitor International based on the World Bank

Note: Data is sourced from the World Bank's Doing Business 2016. Doing Business
presents quantitative indicators on business regulations and the protection of
property rights - and their effect on businesses, especially small and medium-size
domestic firms. The data for all sets of indicators in Doing Business 2016 are from
June 2014 until June 2015 (except for paying taxes data which refers to JanuaryDecember 2014). Rankings are based on data sets across 189 countries.

ENERGY
Italy has 0.6 billion barrels of proven crude oil reserves. There are three main oilproducing fields in southern Italy and other fields located offshore in the Adriatic
and in Sicily (both onshore and offshore). The country produced 6.1 million tonnes
of oil equivalent in 2015.
Italy also has 42.4 billion cubic metres of proven reserves of natural gas and it
produced 5.8 million tonnes of oil equivalent in 2015.
Within the EU, Italy has the greatest crude oil refining capacity, at 2.3 million
barrels per day. There are large oil refining facilities along the Mediterranean coast
and on Mediterranean islands, capable of processing a wide range of crude oils from
North Africa and the Persian Gulf.
Italy's energy efficiency (defined as GDP per tonne of energy consumed) rose by
3.3% per year in 2010-2015. This result is slightly lower than the European
average.
Chart 5 Primary Energy Supply (% of total): 2015

Source: Euromonitor International from International Energy Association (IEA)

SOCIETY

Population
Italy's population totalled 60.8 million in 2015. This represented an increase of 3.9
million over the figure for 2000. Median age was 45.0 years in 2015 - 4.9 years

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greater than the figure for 2000 and significantly higher than the regional average.
As measured by median age of population, Italy currently has the third oldest
population in the world (behind Japan and Germany).
The fertility rate has risen slightly in recent years but at 1.4 births per female it is
well below the replacement level. Fertility will remain unchanged over the next 15
years.
Virtually all population gains in recent years are due to immigration. More than six
million immigrants are presently living in Italy - either legally or illegally.
Chart 6 Age Pyramid in 2015 and 2030

Source: Euromonitor International from national statistics/UN

Income and Expenditure

According to the national statistics office, about 10% of the Italian population is
living in poverty. This figure almost doubled in 2012-2014.
Italy's savings ratio is slightly below the regional average. In 2015, savings were
7.8% of disposable income and it will dip to 7.2% in 2016.
In 2015, consumer expenditure per capita totalled ?16,576 (US$18,384). In 2016,
the indicator will rise by 1.2% in real terms. During the period of 2015-2030,
housing and health goods and medical services are expected to be the categories
showing strongest growth in expenditure.
Total consumer expenditure (in real terms) will rise by 1.4% in 2016. In the period
2015-2030, total consumer expenditure will grow at an average annual rate of
1.2%. It will increase by a cumulative value of 19.0% during that period. Total
consumer expenditure will represent 61.1% of GDP in 2016.
Disposable income per capita was ?17,653 (US$19,579) in 2015. Growth (in real
terms) of 0.4% is expected in 2016.
During the period 2015-2030, total disposable income will increase by a cumulative
value of 13.7% in real terms - growing at an average annual rate of 0.9%.
Chart 7 Per Capita Annual Disposable Income, Spending and Savings Ratio:
2010-2016

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Source: Euromonitor International from national statistics/trade sources/OECD

Note: Data for 2016 is forecast. Per capita income and spending are in constant 2015 prices

Statistical Summary
2010

2011

2012

2013

2014

2015

Inflation
(%
change)

1,5

2,7

3,0

1,2

0,2

0,0

Exchange
rate (per
US$)

0,76

0,72

0,78

0,75

0,75

0,90

Lending
rate

4,0

4,6

5,2

5,1

4,9

4,2

GDP (%
real
growth)

1,7

0,6

-2,8

-1,7

0,1

0,7

GDP
(national
currency
millions)

1.604.514,6

1.637.461,1

1.613.264,9

1.604.598,6

1.620.381,5

1.642.443,5

GDP (US$
millions)

2.124.931,8

2.276.777,9

2.072.870,8

2.130.481,9

2.149.814,8

1.821.579,5

Birth rate
(per '000)

9,5

9,2

9,0

8,5

8,4

8,3

Death rate
(per '000)

9,9

10,0

10,3

10,0

9,9

9,9

No. of
households
('000)

25.030,3

25.405,7

25.723,4

26.154,2

26.938,8

27.257,9

Total
exports
(US$
millions)

446.814,7

523.404,4

501.545,9

518.113,5

529.803,9

458.759,0

Total
imports
(US$
millions)

486.930,6

558.937,3

489.105,9

479.343,8

474.397,6

408.970,7

38.438,0

43.243,0

40.665,3

43.341,5

Tourism
receipts
(US$

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millions)
Tourism
spending
(US$
millions)

26.907,0

28.730,0

26.775,6

28.143,4

Urban
population
('000)

40.462,4

40.765,6

40.937,6

41.258,4

42.119,5

42.267,4

Urban
population
(%)

68,4

68,7

68,9

69,1

69,3

69,5

Population
aged 0-14
(%)

14,1

14,1

14,0

14,0

13,9

13,8

Population
aged 15-64
(%)

65,5

65,4

65,2

64,8

64,7

64,6

Population
aged 65
(%)

20,4

20,5

20,8

21,2

21,4

21,6

Male
population
(%)

48,4

48,4

48,4

48,4

48,5

48,5

Female
population
(%)

51,6

51,6

51,6

51,6

51,5

51,5

Life
expectancy
male
(years)

79,5

79,7

79,8

80,3

80,7

80,9

Life
expectancy
female
(years)

84,7

84,8

84,8

85,2

85,6

85,8

Infant
mortality
(deaths per
'000 live
births)

3,0

2,9

2,9

2,9

2,8

2,7

Adult
literacy
(%)

98,9

99,0

99,0

99,1

99,1

99,2

Imports and Exports

Major export destinations

2015
Share (%)

Major import sources

2015
Share (%)

Exports (fob) to Europe

66,1

Imports (cif) from Europe

68,9

Exports (fob) to Asia

Pacific

9,6

Imports (cif) from Asia

Pacific

15,2

Exports (fob) to North

America

9,5

Imports (cif) from Africa

and the Middle East

8,2

Exports (fob) to Africa and

the Middle East

9,3

Imports (cif) from North

America

4,2

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Exports (fob) to Latin

America

3,3

Imports (cif) from Latin

America

2,6

Exports (fob) to Other

Countries

1,2

Imports (cif) from Other

Countries

0,8

Euromonitor International 2016

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