Daily Management Review

IMF Says Italy’s Stimulus Agenda ‘Transform A Slowdown Into A Recession’


11/20/2018


IMF recommends to cut down on spending and to consider a “modest” financial consolidation.



The International Monetary Fund cautioned that the stimulus plan of Italy for fiscal year may open the vulnerable door for the country to usher in “higher interest rates” ultimately pushing the country into recession. However, the IMF has recommended that Italy could consider a “modest” financial consolidation to bring down the “financing costs”.
 
Following an “annual staff review” on the economic policies of Italy, IMF stated that any gains that are temporary in nature or that “near-term growth” from the stimulus could potentially be overshadowed by “rapid deterioration” which cast “substantial risk”. In IMF’s words:
“Materialization of even modest adverse shocks, such as slowing growth or rising spreads, would increase debt, raising the risk that Italy could be forced into a large fiscal consolidation when the economy is weakening. This could transform a slowdown into a recession.”
 
The government of Italy has projected a 2.4% deficit GDP (gross domestic product) for the year of 2019; the said number seems to be three times compared to the target set by the previous government. Moreover, the IMF has higher GDP deficit projection of 2.66% for 2019 with the stimulus, while extrapolating the rise to “2.8-2.9 percent in 2020-2021”.
 
According to Reuters report, the spending is aimed to support “campaign promises” made by the ruling parties which include “the anti-establishment 5-Star Movement and right-wing League”, besides lowering the retirement age, cutting down taxes, investing in infrastructure and boosting welfare.
 
Glancing at the economies in the European Union, Italy seems to stand out with the “largest debt” amount, which is standing at 131% of GDP. Moreover, the country is facing pressure of the EU so as to curb its spending, while fears are rife that this could ignite “a new debt crisis in the euro zone”.
 
Furthermore, IMF added that if the stimulus is not met with offsetting additional revenues, the mid-term growth may show negative figures. The IMF’s recommendation advises Italy to cut down on spending while the “economic conditions remain favourable” and keeping an aim of a “small overall surplus in 4-5 years”.
 
 
References:
reuters.com







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