Annual Report Annual Report Rome, 31 May 2019 YEAR FINANCIAL YEAR FINANCIAL th FINANCIAL 125 th 125 125th 2018 2018 Financial Year Financial Annual Report th 2018 – 125 Financial Year Rome, 31 May 2019 © Banca d’Italia, 2019 Address Via Nazionale, 91 00184 Rome - Italy Telephone +39 0647921 Website www.bancaditalia.it All rights reserved. Reproduction for academic and non-commercial use is permitted, provided that the source is acknowledged. ISSN 2239-9674 (print) ISSN 2280-4145 (online) The English edition has been translated from the Italian by the Language Services Division. Printed by the Printing and Publishing Division of the Bank of Italy, Rome, September 2019. The Bank of Italy’s Annual Accounts and the Statistical Appendix to the Annual Report are available on the Bank of Italy’s website. CONTENTS THE INTERNATIONAL ECONOMY 1. Cyclical developments and world trade 3 The economic situation and macroeconomic policies 3 Box: Recent trade tensions and their implications 8 International trade and global current account imbalances 11 Commodity prices and markets 13 International financial markets 14 Box: The reform of global governance: the proposals of the Eminent Persons Group to the G20 18 THE EURO-AREA ECONOMY 2. The economy and fiscal policies of the euro area 23 Cyclical developments 23 Box: Labour mobility and shock absorption in the euro area 24 Prices and costs 26 Box: Why has wage growth not passed through to prices yet? 27 The financial markets 29 Fiscal policies 30 European economic governance 33 3. Monetary policy in the euro area 35 Monetary policy action 35 Box: Expansionary monetary policy and the risk tolerance of banks 36 Monetary policy operations 39 Interest rates and the euro exchange rate 40 Money and credit 41 Box: The effects of TLTRO II on the credit market 43 BANCA D’ITALIA Annual Report 2018 III THE ITALIAN ECONOMY 4. Overview 47 Box: Determinants of economic activity in 2018 according to the Bank of Italy’s model 48 Box: Italy’s output gap 49 Box: Regional trends 51 5. Households 56 Income and income distribution 56 Box: Labour income inequality across households 58 Box: An analysis of the redistributive effects of recent anti-poverty measures 60 Consumption 63 Box: The role of inflation expectations in Italian households’ consumption decisions 65 Property wealth and the housing market 66 Box: The rental market in Italian cities 67 6. Firms 69 Economic developments 69 Box: Financial crisis and technological change: the role of start-ups 75 Box: Italy’s digital lag 77 Box: The characteristics of highly productive Italian firms 80 Box: Directors and firms’ performance 82 7. The financial situation of households and firms 84 HOUSEHOLDS 84 Financial wealth and investment 84 Box: Household investments through Italian asset management products 86 Box: Online banking and portfolio choices 88 Borrowing 89 FIRMS 90 Profitability and financial balance 90 Annual Report BANCA D’ITALIA IV 2018 Sources of funding 92 Box: The listing of non-financial corporations: a comparison between the main European countries 94 8. The labour market 97 Employment and hours worked 97 Box: The impact of broadband internet on Italian firms 100 Labour supply and unemployment 102 Box: The role of public employment services in the labour market 104 Box: Italy’s risk of a brain drain after the Great Recession 106 Collective bargaining and industrial relations 108 9. Prices, costs and competitiveness 109 Consumer prices 109 Box: Italian firms’ inflation expectations and price strategies 110 Producer and import prices 113 Labour costs 113 Box: Labour market mobility and wage pressures 113 Price competitiveness 115 10. Foreign demand and the balance of payments 117 Exports and imports 117 Box: Euro-area trade and new competitors 118 The current account 121 Box: Italy’s exports of services 123 The financial account 125 Box: An analysis of the portfolio of the foreign investment funds held by Italian households 125 Box: Foreign capital flows in Italy in 2018 127 The net international investment position 130 11. The public finances 132 Budget outturns for 2018 132 Box: The spread between the average cost of the debt and nominal GDP growth: recent trends and outlook 138 BANCA D’ITALIA Annual Report 2018 V Box: Looking beyond the public debt: commercial liabilities and liabilities in derivatives 139 The outlook 141 Box: The budget cycle within the context of the European Semester 142 Box: An analysis of the macroeconomic and redistributive effects of the safeguard clauses on VAT 145 12. Business activity regulation and the institutional environment 151 Competition and market regulation 151 Box: The effects of the deregulation of shop opening hours 152 The regulation of business activity 154 Box: Family firms: numbers, operating environment and performance 157 The institutional environment 158 13. Banks and institutional investors 161 BANKS 161 The structure of the Italian banking industry 161 Assets 163 Box: The effect of taxation on the total cost of credit over the period 1998-2017 165 Non-performing loans 167 Box: Closure times for bad business loans 168 Funding 170 Capital and profitability 171 Box: Banks and the placement of corporate securities 173 NON-BANK FINANCIAL INTERMEDIARIES AND LOAN GUARANTEE CONSORTIUMS 175 INSTITUTIONAL INVESTORS 175 14. The money and financial markets 179 The money market 179 Public sector securities 180 Box: The trend in Italian government bond spreads 182 Annual Report BANCA D’ITALIA VI 2018 Corporate bonds and bank bonds 184 The equity market 185 Box: The Italian stock market’s performance in recent years 186 Box: The venture capital market in Italy 190 Market infrastructure 192 SPECIAL FEATURES 15. Tourism in Italy: figures and development potential 195 The contribution of tourism to the Italian economy and medium-term trends 195 The distribution of tourism spending in Italy 198 Travel content and cultural tourism 199 Box: Innovations in state-owned museums: findings from a survey by the Bank of Italy 200 The tourist accommodation industry 202 Italy’s standing in the global tourism market 203 16. Public investment 205 Public investment expenditure and economic activity 205 Box: The macroeconomic effects of public investment expenditure: a comparative analysis of the estimates 207 Public investment expenditure and infrastructure 209 Timeframes and obstacles to the completion of infrastructure projects 212 ADMINISTRATION OF THE BANK OF ITALY 215 BANCA D’ITALIA Annual Report 2018 VII SYMBOLS AND CONVENTIONS Unless otherwise specified, Bank of Italy calculations; for Bank of Italy data, the source is omitted. In the tables: – the phenomenon does not exist; .... the phenomenon exists but its value is not known; .. the value is nil or less than half of the final digit shown; :: not statistically significant. In the figures with different right- and left-hand scales, the right-hand scale is identified in the notes. For the abbreviations of the names of the European countries used in this publication, please refer to the EU’s Interinstitutional Style Guide. Annual Report BANCA D’ITALIA VIII 2018 THE INTERNATIONAL ECONOMY 1. CYCLICAL DEVELOPMENTS AND WORLD TRADE In 2018 protectionist pressures prevailed over world trade liberalization processes, marking a reversal in the trend compared with the previous two years. World economic growth decreased to 3.6 per cent, falling short of expectations of a strengthening. This reflected the progressive deterioration of the economic situation, first in the emerging countries and then in many advanced countries. Specific factors, partly of a temporary nature, such as the natural disasters that hit Japan and the stalling of the auto industry in the euro area, interacted with the high degree of uncertainty at global level, which was mainly due to the trade tensions between the United States and China. This had an impact on investment expenditure and international trade, which slowed sharply in the second half of the year; in the United States, however, GDP rose, in part owing to the expansionary effects of the tax reform enacted in December 2017. The increase in US interest rates led to episodes of turbulence in the financial markets, with sharp rises in volatility. During the summer, the currencies of the emerging economies depreciated, risk premiums rose and capital inflows declined, especially in the countries most reliant on external sources of funding. In the last part of the year, heightened fears of a global slowdown led to a correction in the prices of the riskiest assets in the advanced countries and a drop in oil prices. At the start of 2019 the monetary policy stance of the United States became more accommodative, leading to an easing on financial markets, a decline in long- term yields, and a rise in stock prices. The risk of the United Kingdom's exit from the European Union without an agreement persists, although it is no longer immediate. The economic situation and macroeconomic policies The main advanced economies. –In 2018 economic activity in the advanced countries slowed slightly, to 2.2 per cent (Table 1.1). The slowdown was more marked in Japan, partly owing to temporary factors, and less pronounced in the United Kingdom; the United States recorded a robust acceleration. Inflation rose slightly, averaging 2 per cent in the year as a whole. In the United States, GDP accelerated to 2.9 per cent, in line with the IMF’s initial forecasts (Figure 1.1.a). The expansion was led mainly by private consumption and, in the first part of the year, productive investment, driven by both the tax BANCA D’ITALIA Annual Report 2018 3 Table 1.1 GDP and inflation in the main advanced and emerging countries (percentage changes on previous period) GDP Inflation (1) 2017 2018 2017 2018 Advanced economies 2.4 2.2 1.7 2.0 Japan 1.9 0.8 0.5 1.0 United Kingdom 1.8 1.4 2.6 2.3 United States 2.2 2.9 1.8 2.0 Emerging and developing countries 4.8 4.5 4.3 4.8 Brazil 1.1 1.1 3.5 3.7 China 6.8 6.6 1.6 2.1 India 6.9 7.4 3.3 3.9 Russia 1.6 2.3 3.7 2.9 Sources: IMF and national data.