Boston, MA -- (ReleaseWire) -- 01/09/2014 -- The grand coalition of centre-right Prime Minister Enrico Letta was strengthened by the emergence of a more moderate centre-right party led by Deputy Prime Minister Angelino Alfano, who broke from his long-time ally Silvio Berlusconi by pledging his continuing support for the government. Although this bolsters the prospects for fiscal and structural reform, we continue to believe that progress will remain painfully slow.
Lack of significant reform anytime soon seriously jeopardises Italy's long-term growth trajectory, and raises the risks that the public sector debt burden will become unsustainable.
However, the very high public sector debt levels imply that Italy will eventually be forced to undergo a period of fiscal consolidation over the next decade, which will likely have negative implications for the country's social fabric, regional and global standing and governability.
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Major Forecast Changes
We now forecast the Italian economy to contract by 1.8% in 2013, from our previous -1.5% forecast. The recovery in 2013 remains sluggish, with consumption, investment and exports all remaining broadly weakened through H113.
Key Risks To Outlook
Despite Letta's revamped coalition, we see the potential for future bouts of political instability, as left and right parties continue to seek divergent agendas. Furthermore, there is the potential for the government to overreach in its attempts to stimulate economic growth, creating a visible deterioration of fiscal accounts. Both of these scenarios would potentially create a crisis of investor confidence that would necessitate decisive fiscal consolidation to protect debt sustainability. This would severely damage the outlook for investment and consumption, necessitating a downward revision of our growth forecast.
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