3rd December 2015

Mauro Pisu OECD Senior Economist

OECD ECONOMIC OUTLOOK

Moving forward in difficult times

Key issues

2

Global trade weakness

• Harbinger of further slowing of global GDP growth?

• China’s role at centre via commodity prices and global value chains

• Advanced economies resilient so far

Investment disconnect

• Real investment continues to disappoint, especially in euro area and Italy

• Unemployment still high in much of the euro area and Italy

Policy reconfiguration to support demand

• Monetary policy support still needed

• Resume momentum for structural reforms, especially financial sector and network services in Europe

• Take advantage of low interest rates to increase public infrastructure investment

-4

-2

0

2

4

6

8

-4

-2

0

2

4

6

8

2011 2012 2013 2014 2015 2016 2017

Y-oy % changesY-oy % changes

World OECD Non-OECD Italy World average-1995-07

Global GDP growth: modest projected upturn (given smooth slowdown in China and more robust investment in advanced economies)

3 1. Moving nominal GDP weights using purchasing power parities. 2. Fiscal years starting in April. Source: OECD Economic Outlook 98 database.

Real GDP

Annual percentage changes

GDP

2014 2015 2016 2017

World1 3.3 2.9 3.3 3.6

United states 2.4 2.4 2.5 2.4

Euro Area 0.9 1.5 1.8 1.9

Italy -0.4 0.8 1.4 1.4

Japan -0.1 0.6 1 0.5

China 7.3 6.8 6.5 6.2

India2 7.3 7.2 7.3 7.4

Brazil 0.2 -3.1 -1.2 1.8

Dramatic slowdown in global trade growth Such low rates historically occur with recessions

4

Import volumes

Source: OECD Economic Outlook 98 database.

Global trade volumes and GDP

Weaker import growth in China is a key element of the broader trade slowdown

5

China: Real GDP and import volumes

Note: 2015 is change in the first three quarters vs 2014. Import volumes are deflated based on OECD estimates. Nominal imports during the first three quarters of 2015 were down 8 per cent. Sources: OECD Economic Outlook 98 database.

Commodity price changes and China’s share of global consumption

Note: Commodities shown are aluminium, coal, copper, iron ore, lead, natural gas, nickel, oil, uranium and zinc. Sources: IMF; BP Statistical Review of World Energy; World Bureau of Metal Statistics.

This has exerted downward pressure on commodity prices

Chinese import growth has slowed sharply

Rebalancing is happening in China, but its pace is uncertain

6

Manufacturing and services growth

Services have been growing faster than manufacturing, associated with more consumption

But forecasters are unsure about the true underlying pace of GDP growth

GDP forecasts for China and number of forecasters

Sources: Chinese National Bureau of Statistics; Bloomberg.

Weaker Chinese import growth helps explain slowdowns among other EMEs

7

Note: For Korea, 2015 Q3 compared to 2014 Q3. Intensive trade with China is where merchandise exports to China were above 2% of GDP in 2014. Sources: OECD National Accounts database; IMF; UNCTAD.

Sharpest slowdowns in countries with close trade links to China and/or dependent on commodities

Change in GDP growth Y-o-y growth in 2015 Q2 compared to y-o-y growth in 2014 Q2

As a group, advanced economies have so far been resilient to EME weakness

8

Revisions to OECD Economic Outlook projections between June and November 2015

Sources: OECD June and November 2015 Economic Outlook databases.

GDP projections for OECD economies changed little compared to BRIICS

Although OECD export growth has been revised down sharply

Unemployment is decreasing and should yield healthier wage growth, but haven’t yet

9

Unemployment rate

Source: Economic Outlook 98 database.

Compensation per employee

2

4

6

8

10

12

14

2007 2009 2011 2013 2015 2017

%

ItalyUnited StatesJapanOECDEuro Area

0.5

1.0

1.5

2.0

2.5

3.0

3.5

OECD UnitedStates

Japan Euro Area Italy

% changes

2014

2015

2016

2017

5

6

7

8

9

10

11

12

13

14

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2007 2009 2011 2013 2015 2017

%Y-o-Y % changes

Employment

Unemployment rate

Italy: the cyclical recovery driven by labour market gains

10

Lower unemployment being accompanied by higher employment

Source: Economic Outlook 98 database.

-6

-4

-2

0

2

4

6

8

10

12

-3

-2

-1

0

1

2

3

4

5

6

2007 2009 2011 2013 2015 2017

%Y-o-Y % change

Price inflat ionWage inf lationOutput gap

Italy: Large slack is mitigating inflationary pressures

11 Source: Economic Outlook 98 database.

Euro area and Italy growth hampered by weak investment; credit recovering but still tight

12

Credit flows show signs of slow recovery²

Investment remains low¹

1. Real total gross fixed capital formation.

2. Loans to non-financial corporations adjusted for sales and securitisation.

Source : OECD Economic Outlook 98 database and European Central Bank.

-12

-10

-8

-6

-4

-2

0

2

4

6

8

2010 2011 2012 2013 2014 2015

Y-o-y % change

France Germany Italy Spain

80

85

90

95

100

105

2007 2008 2009 2010 2011 2012 2013 2014 2015

Q4 2007 = 100

65

70

75

80

85

90

95

100

105

110

115

120

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Index 2008q1=100

United States JapanEuro Area ItalyOECD commodity exporters

Real investment is weak, especially in Italy

13

Real fixed investment

1. OECD commodity exporters includes Australia, Canada, Chile, Mexico and Norway. Source: OECD Economic Outlook 98 database.

Projected improvement assumes favourable structural and demand policy settings

Italy: bank lending growth to enterprises especially weak, still

14 Source: Banca d'Italia, statistical database.

-8

-6

-4

-2

0

2

4

6

8

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Loans to domestic non-financial enterprises

Loans to households

Total

Y-o-y % changes

The credit channel is impaired by high non-performing loans

15

Deleveraging proceeded faster and further in the United States than in the euro area; level of private debt not high in Italy

Non-performing loans are high and still rising in some countries

Combined debt of households and non-financial corporations

Source: Eurostat; OECD Main Statistical Database; OECD National Accounts Database

0

2

4

6

8

10

12

14

16

18

2007 2008 2009 2010 2011 2012 2013 2014

% of total

Germany Spain France Italy

1. Gross non-performing debt instruments as a percentage of total debt instruments. Source: European Central Bank.

Non-performing loans1

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2013 2014 2015 2016 2017

%, y -o-y%, y -o-y Italy United States Euro area

Monetary policy support is required to reach inflation targets

16

Core inflation

Note: Consumer prices excluding food and energy. The private consumption deflator is used for the United States. For Japan, excludes the estimated impact of the consumption tax increases in April 2014 and April 2017. Source: OECD Economic Outlook 98 database.

Core inflation is not projected to reach central bank target levels within 2 years in any major advanced economy

Accompanying structural reforms needed so as to improve credit channel (euro area and Italy) and to promote resource reallocation (Japan)

Collective action on public investment could support growth without worsening debt ratios

17

1st year effects of a ½ per cent of GDP public investment stimulus by all OECD economies Change from baseline

Note: Simulation using the NiGEM model, based on a two-year increase in the level of government investment equivalent to ½ per cent of GDP per annum in all OECD countries. The euro area figures are a weighted average of Germany, France and Italy. Source: OECD calculations.

Collective action, quality projects, and structural policy efforts are required to realise these gains

Italy: labour market participation is structurally low, especially for women

18 Source: OECD Economic Outlook 98 database.

Labour force participation rate Men Women

72

74

76

78

80

82

84

86

88

2000 2002 2004 2006 2008 2010 2012 2014

% France GermanyItaly United KingdomOECD

45

50

55

60

65

70

75

80

2000 2002 2004 2006 2008 2010 2012 2014

%France GermanyItaly United KingdomOECD

Structural factors holding Italy back

Note: The figure shows the percentage of workers who are either over- or under- skilled and the simulated gains to

allocative efficiency rom reducing skill mismatch in each country to the best practice level of mismatch. The figures are

based on OECD calculations using OECD Survey of Adult Skills (2012).

Source: M. Adalet McGowan and D. Andrews (2015), "Labour Market Mismatch and Labour Productivity: Evidence from

PIAAC Data" OECD Economics Department Working Paper No. 1209.

Italy: Skill mismatches hold back productivity and wage growth

Potential gains from reducing skill mismatch

0

2

4

6

8

10

12

0

5

10

15

20

25

30

35

40

POL CAN BEL SWE USA FRA NLD DNK JPN FIN EST KOR GBR NOR SVK AUS DEU AUT IRL CZE ESP ITA

Percentage of workers with skill mismatch (LHS)

Gains to labour productivity from reducing skill mismatch (RHS)

Structural factors holding Italy back

Note: The dot is the average probability to have mismatch evaluated at the median level of the policy and individual characteristics. The distance between the Min/Max of the relevant policy indicator and the median is the change in the probability of skill mismatch with the respective policy change. Source: M. Adalet McGowan and D. Andrews (2015), "Labour Market Mismatch and Labour Productivity: Evidence from PIAAC Data" OECD Economics Department Working Paper No. 1209.

Skill matching affected by structural policies and business environment

Framework policies can reduce skill mismatch

Structural factors holding Italy back

Solid growth at the global productivity frontier but spillovers disappoint Labour productivity; index 2001=0

Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy: micro evidence

from OECD countries ” forthcoming OECD Working Paper.

Innovation and Diffusion Investment is a key support

Structural factors holding Italy back

Source: Saia, A., D. Andrews and S. Albrizio (2015), “Public Policy and Spillovers From the Global Productivity Frontier: Industry Level Evidence”, OECD Economics Department Working Papers, forthcoming.

Globalisation Reallocation Knowledge-Based Capital

Estimated frontier spillover (% p.a.) associated with a 2 percentage point increase in MFP growth at the global productivity frontier

Italy: economic environment hinder the diffusion of innovation

Structural factors holding Italy back

Italy: Returns to education are low negative feedback loop between education, skills,

growth

Structural factors holding Italy back

Italy: barriers to competition have been reduced

24

Changes in the strictness of regulatory barriers to competition Average OECD indicator of product market regulation, overall index and three main sub-components

Source: OECD calculations.

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

Product marketregulation

State control Barriers toentrepreneurship

Barriers to trade andinvestment

1998-2003 2003-2008 2008-2013

OECD Italy OECD Italy OECD Italy OECD Italy

Structural factors holding Italy back

…call for more efficient public administration

Conflict resolution in courts is too slow and expensive

Austria

Denmark Estonia

Finland

France

England and Wales

Hungary

Korea

Netherlands

Norway New Zealand

Turkey

Slovak Republic

Slovenia

Italy

Japan

OECD

100

150

200

250

300

350

400

450

500

550

600

6 8 10 12 14 16 18 20 22 24 26 28 30 32

Total cost of trial net of legal aid (as a percentage of the value of the claim)

Trial length in days, first instance

Source: World Bank, Doing Business (database); and Palumbo, G. et al. (2013), “Judicial Performance and its Determinants: A Cross-Country Perspective”, OECD Economic Policy Papers, No. 5, OECD Publishing, Paris,

Structural factors holding Italy back

Summary

27

Despite recent weakness, global trade and GDP are expected to recover in 2016-17

The projections assume effective policies and collective action reflected in revived investment and wage growth

Structural reform efforts need to be revived to support monetary and fiscal efforts

Infrastructure spending, including for climate change mitigation, could help in the short as well as the long term

Summary

28

The near-term outlook for Italy is better than the recent past

Cyclical recovery driven by the labour market reform and reviving labour market

…but structural problems remain: low labour market participation rate, chronically low investment, non-perfoming loans, inefficient public administration, skills and education contributing to low productivity growth

Need continue on the path of structural reforms the government has taken

“avanti tutta con le riforme!”

http://www.oecd.org/economy/economicoutlook.htm

Back up

29

30

Source: IPCC.

Tackling climate change is a long-term challenge but must be more ambitious now

31

Collective action is needed, but advanced economies have lost momentum

Global new investment in renewable energy

Note: New investment volume adjusts for re-invested equity. Total values include estimates for undisclosed deals. Developed volumes are based on OECD countries excluding Mexico, Chile and Turkey. Sources: Bloomberg New Energy Finance; UNEP; Frankfurt School for Climate & Sustainable Energy Finance.