PARIS (MNI) – Renewed financial market tension and the anticipated
affects of deficit cutting by some Eurozone member governments have
heightened the uncertainty surrounding the economic outlook for the
second half of 2010, the Bank of Italy said in its July Economic
Bulletin, published Thursday.

The central bank also noted that despite a gradual recovery in
industrial output in the Eurozone, “the degree of plant utilization
still remains low, contributing to a brake on investment spending.”

The uncertainty is being felt by households around Europe, as
reflected in consumer surveys that have interrupted their climb, the
Bank of Italy said. Business confidence surveys on the other hand have
been more favorable, “benefiting principally from positive judgments on
the outlook for orders, particularly in Germany and plausibly tied to
the gradual improvement in competitive position and the reinforcement of
world trade,” the bank said.

However, the margin of uncertainty about the international recovery
remains large “in both directions,” the Bank of Italy said. Emerging
market economies could accelerate in the months ahead, but if they were
to overheat, it could require more restrictive policies in the
industrialized countries, the bank said.

Given the imminent expiration of stimulus measures in
industrialized world, “the solidity of internal components of demand
will be crucial,” the bank argued.

On the home front, the Italian central bank said Italy’s economy
this year and next would be sustained by foreign demand, “as in
comparable cyclical phases in the past.” It said world trade would be
the driving factors pushing the Italian economy to a growth rate of 1%
both this year and in 2011.

The bank predicted a slowdown of economic activity in the second
half of 2010, compared with the first half, as government stimulus
measures end. In 2011, the impact of a restrictive fiscal policy by the
Italian government, which is intent on cutting its public deficits and
debt, will also weigh on activity.

The recent depreciation of the euro should push Italian consumer
inflation higher — to an average rate of 1.5% this year, followed by
1.9% in 2011, the bulletin projected.

–Paris Newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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