Growth predicted for Italian economy

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MILAN (Reuters) -- Italy's economy could grow faster than the government targets in 2000 as spending resumes after years of restraint needed to squeeze Italy into the single currency, a poll of economists suggested on Thursday. The economists, polled by Reuters, on average predicted the economy would grow by three percent this year, outstripping the 2.8 percent growth forecast by the government. A cyclical export-led recovery evident across Europe from the end of 1999 gathered steam in Italy mid-year as consumers from Milan to Messina began loosening their purse strings as the labour market improved.

"Internal demand is picking up," said Alessia Berardi, an economist at Banca Popolare di Vicenza. "Industrial production and retail sales data are both stronger than expected."

Or, as a jubilant Treasury Minister Vicenzo Visco said last month after parliament approved an economic planning document cutting income taxes by one percent in 2001: "It's possible that we'll find ourselves at year's end in the middle of a boom like we haven't seen in years." Economists were clearly more bullish mid-year than they were in the previous quarterly poll, when they were forecasting growth of 2.7 percent this year and 2.9 percent in 2001.

Although its economy lags behind other euro-zone partners in terms of growth, Italian consumer confidence rose to its highest level in two years in July, reflecting more optimism about economic performance and job prospects.

April industrial output posted its highest rise in 18 months, and separate figures showed Italy's jobless rate dropped to a seven-year low that month.

"The labour market is improving, and this is supporting consumption," said Lorenzo Codogno, chief euro zone economist at Bank of America in London, who sees GDP growth at 3.3 percent for the year. Inflation is seen at 2.5 percent for the year, a touch above the government's forecast of 2.3 percent but below July's provisional 2.6 percent.

"The Italian economy started from a low base so it still has more room to grow (than other European economies) without triggering inflation," said Eric Britton, senior international economist at Oxford Economic Forecasting.

Economists polled by Reuters did not overplay Italian inflation, pointing out it was caused mainly by higher oil prices that affected other euro zone countries as well.

Despite the good numbers it's too early to break out the champagne, economists say. Italy's supply-side rigidities are likely to prevent it from realising its full potential, causing economic growth to underperform its euro-zone partners and inflation to remain above the EU average.

"The pace of (political) change is not sufficient to guarantee Italy will take advantage of the current situation to make necessary reforms," said Bank of America's Codogno. Italy's notoriously unstable political situation no longer has a determining impact on the economy, but increasing prospects that the centre-right coalition will win next year's elections raises the risk of uncertainty, economists said.

More concretely, continued economic growth depends on a healthy increase in consumer spending, economists agree. But they are divided on whether the deep tax cuts that could spark consumer spending will ever arrive. "Germany's tax cuts will provide a powerful stimulus for Italy to do the same," said Banca Popolare di Vicenza's Berardi. Others point out that Italy's hands are tied by the massive national debt accumulated by the bad spending habits of the 1980s. "I don't know if the tax reform in Italy will ever match Germany's," said Daniele Castelnuovo, an economist at Banca Akros whose GDP forecast was towards the low end of the range.

"Germany had a wider margin for tax cuts because the debt-to-GDP ratio is about half of Italy's."

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