Macroeconomic Performance

After slowing down through much of the decade, the Italian economy grew strongly in 2000. Employment rose and unemployment fell. Business and household confidence continued to be high for most of the year supported by fiscal reforms as well as progress in structural reforms in the product and labour markets. However, signs of weakness emerged towards the middle of the year and these were confirmed in 2001. The short-term outlook has been further clouded by the blow to confidence caused by the 11 September terrorist attacks in the United States (Table 1). The downturn is primarily attributable to external influences. Because of higher oil prices, consumer price inflation increased, peaking at 3 per cent in early 2001. This weakened consumer spending, and the slowdown of world demand led business to cut back investment. Improved conditions on the labour market, especially in the service and construction sectors, may have limited the setback to domestic demand growth, and the trend in inflation is now downwards. But protracted weakness abroad could undermine confidence and growth in the sectors where activity so far has held up well. Indeed, the main uncertainty facing the Italian economy would seem to be the timing and the momentum of the projected rebound of the world economy. The remainder of this chapter starts with a review of the recent macroeconomic developments and the short-term outlook. It then discusses the medium-term supply issues raised by Italian productivity.