The Italian Economy

According to GDP calculations, as measured by purchasing power parity (PPP), Italy is ranked as the eighth largest economy in the world in 2006, behind the United States, Japan, Germany, India, China, UK, and France, and the fourth largest in Europe. According to the OECD, in 2004 Italy was the world's sixth-largest exporter of manufactured goods. This capitalistic economy remains divided into a developed industrial north, dominated by private companies, and a less developed agricultural south. Most raw materials needed by industry and more than 75% of energy requirements are imported. Over the past decade, Italy has pursued a tight fiscal policy in order to meet the requirements of the Economic and Monetary Union and has benefited from lower interest and inflation rates. Italy joined the Euro from its conception in 1999.

Italy's economic performance has at times lagged behind that of its EU partners, and the current government has enacted numerous short-term reforms aimed at improving competitiveness and long-term growth. It has moved slowly, however, on implementing certain structural reforms favoured by economists, such as lightening the high tax burden and overhauling Italy's rigid labour market and expensive pension system, because of the current economic slowdown and opposition from labour unions.

Overview

The Italian economy has changed dramatically since the end of World War II. From an agriculturally based economy, it has developed into an industrial state ranked as the world's fifth-largest industrial economy. Italy belongs to the Group of Seven (G-7) industrialized nations; it is a member of the European Union and the OECD.

Italy has few natural resources. With much of the land unsuited for farming, it is a net food importer. There are no substantial deposits of iron, coal, or oil. Proven natural gas reserves, mainly in the Po Valley and offshore Adriatic, have grown in recent years and constitute the country's most important mineral resource. Most raw materials needed for manufacturing and more than 80% of the country's energy sources are imported. Italy's economic strength is in the processing and the manufacturing of goods, primarily in small and medium-sized family-owned firms. Its major industries are precision machinery, motor vehicles, chemicals, pharmaceuticals, electric goods, and fashion and clothing.

Italy's economy slowed from 2.8% GDP growth in 1995 to 0.7% in 1996, one of the lowest growth rates among the industrialized economies.

Continuing a positive trend of recent years, Italy's foreign balances improved further in 1996, with weakening export growth more than compensated by falling imports. Italy posted a $60-billion trade surplus (fob/fob) in 1996, up from a $44-billion surplus in 1995. Its current account surplus of $42 billion was also up from 1995's $28-billion surplus. Inflation fell to 3.9% in 1996 after rising to 5.4% in 1995 and is continuing its downward trend in 1997. Through May of 1997, inflation was running at a 1.6% year-on-year rate.

The biggest economic challenge facing Italy remains imbalances in public finances. Since 1992, economic policy in Italy has focused primarily on reducing government budget deficits and reining in the national debt. Successive Italian governments have adopted annual austerity budgets with significant cutbacks in spending, as well as new revenue raising measures.. The deficit in public administration declined in 1996 to 6.7% of GDP, down from 7% in 1995. According to government calculations, the deficit could fall to 3% of GDP in 1997, in line with the Maastricht Treaty target for European Monetary Union.

The national debt should continue to decline slowly. It stabilized in 1995 at roughly 124% of GDP, declined slightly in 1996, and continues to shrink in 1997 and beyond. Given the heavy weight of interest payments in government expenditures, public finances remain susceptible to international capital market developments, as well as domestic political developments.

Italy's closest trade ties are with the other countries of the European Union, with whom it conducts about 59% of its total trade. Italy's largest EU trade partners, in order of market share, are Germany (18%), France (13%), and the United Kingdom (7%).

Labor

Unemployment remains high (12.6% for 1998). It is especially severe in the south where average unemployment for the year was 21.8%. Women and youth have significantly higher rates of unemployment than men. A rigid labor market serves as a disincentive to job creation. There is a significant underground economy absorbing substantial numbers of people, but they work for low wages and without standard social benefits and protections.

Unions claim to represent 40% of the workforce. Most Italian unions are grouped in three major confederations: the Italian General Confederation of Labor (CGIL), the Italian Confederation of Labor Unions (CISL) and the Union of Italian Labor (UIL). These confederations formerly were associated with important political parties or currents, but they have formally terminated such ties. Nowadays, the three often coordinate their positions before confronting management or lobbying the government. The three major confederations have an important consultative role on national social and economic issues. Among their major agreements are a four-year wage moderation agreement signed in 1993, a reform of the pension system in 1995, and an employment pact, introducing steps for labor market flexibility in economically depressed areas, in 1996. The CGIL, CISL, and UIL are affiliates of the International Confederation of Free Trade Unions.

Agriculture

Italy's agriculture is typical of the division between the agricultures of the northern and southern countries of the European Union. The northern part of Italy produces primarily grains, sugar beets, soybeans, meat, and dairy products, while the south specializes in producing fruits, vegetables, olive oil, wine, and durum wheat.

Even though much of its mountainous terrain is unsuitable for farming, Italy has a large work force (1.4 million) employed in farming. Most farms are small, with the average farm only seven hectares.

  • National product: GDP - purchasing power parity - $1.2 trillion (1998 est.)
  • National product real growth rate: 0.7% (1998 est.)
  • National product per capita: $21,190 (1998 est.)
  • Inflation rate (consumer prices): 2.9% (1998)
  • Unemployment rate: 12.6% (1998)
  • Budget:
    revenues: $339 billion
    expenditures: $431 billion, including capital expenditures of $NA (1994 est.)
  • Exports: $190.8 billion (f.o.b., 1997)
  • Commodities: metals, textiles and clothing, production machinery, motor vehicles, transportation equipment, chemicals, other
  • Partners: EU 53.4%, US 7.8%, OPEC 3.8% (1997)
  • Imports: $168.7 billion (c.i.f., 1997)
  • External debt: $83 billion (1997 est.)
  • Industrial production: growth rate 4.3% (1996 est.); accounts for 35% of GDP
  • Electricity:
    capacity: 61,630,000 kW
    production: 209 billion kWh
  • Consumption per capita: 4,033 kWh (1993)
  • Industries: machinery, iron and steel, chemicals, food processing, textiles, motor vehicles, clothing, footwear, ceramics
  • Agriculture: accounts for about 4% of GDP; self-sufficient in foods other than meat, dairy products, and cereals; principal crops - fruits, vegetables, grapes, potatoes, sugar beets, soybeans, grain, olives; fish catch of 525,000 metric tons in 1990
  • Illicit drugs: important gateway country for Latin American cocaine and Southwest Asian heroin entering the European market
  • Currency: 1 Italian lira (Lit) = 100 centesimi
  • Exchange rates: Italian lire (Lit) per US$1 - 1,609.5 (January 1995), 1,612.4 (1994), 1,573.7 (1993), 1,232.4 (1992), 1,240.6 (1991), 1,198.1 (1990)
  • Fiscal year: calendar year