PARIS (MNI) – Italy’s economy has lost momentum and has probably
fallen into recession in the fourth quarter, but more fiscal austerity
is needed in order for the country to regain its credibility in
financial markets, the Organization for Economic Cooperation and
Development said Monday.

“Growth was probably negative in late 2011 and is projected to
remain weak in 2012,” the OECD said in its autumn Economic Outlook. “As
this outlook is well below that assumed in the 2012 budget, further
measures will be required (and are included in these projections) to
keep the fiscal adjustment programme on track.”

The OECD urged the new government of Mario Monti to fully implement
the reforms introduced by the previous government of Silvio Berlusconi
and “undertake important structural reforms to spur growth.” It warned
that the fiscal tightening, along with slowing world demand and Italy’s
already weak competitiveness would be a drag on growth in the short
term, but said that “it is needed to ensure progress toward fiscal
sustainability.”

The report cautioned that unemployment in Italy will rise and wage
growth will be moderate, as will inflation “after the impact of a VAT
rise has worked through.”

“Decisive action” by the government, if it brought down Italy’s
spreads quickly and boosted confidence, could lead to somewhat higher
growth, the OECD said. “But the planned fiscal tightening is very
severe, will require strong determination on the part of the new
government, and may have stronger contractionary effects than projected
here.”

The organization added that Italy, “faced with bond market anxiety,
has no room for discretionary fiscal action or for allowing automatic
stabilisers to play.” Not only that, but in the event of an even weaker
economy than currently expected, “there will be little choice but to
introduce further tightening measures to keep fiscal policy on track.”

The OECD projects average annual GDP growth of 0.7% this year,
followed by a contraction of 0.5% in 2012 before the country returns to
growth, albeit meager (+0.5%) in 2013.

It sees little movement in the country’s debt ratio, which is
expected to be 120% of GDP this year, then tick up marginally to 120.4%
next year, before edging down to 118.9% in 2013. The deficit, under
current projections, would be 3.6% of GDP in 2011, 1.6% next year and
just 0.1% in 2013.

–Paris newsroom, +336-16-01-00-35; bwolfson@marketnews.com

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