Visco warns of weaker growth, implications for inflation

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BANK OF ITALY Governor Ignazio Visco joined his European counterparts in signaling that economic growth will be much weaker than predicted, warning of the implications for euro-area inflation.

“The prospects for the Italian economy are less favorable today than they were a year ago,” Visco, who sits on the European Central Bank’s (ECB) Governing Council, said Saturday in a speech to the annual Assiom Forex conference in Rome.

With other euro area members also seeing their economic outlook darken, Visco signaled the impact on inflation already shows. “The transmission of the increase in wages to prices has been slowed by the weakness of economic activity in recent months.”

The comments are likely to add fuel to the debate over what ECB policy makers can do to prop up the economy after they ended bond buying in December and suggested that they don’t see an urgent need to offer banks new long-term loans.

The Banca d’Italia’s forecasts of 0.6% growth this year and about 1% expansion in 2020 are subject to “downside risks, partly originating abroad, but which still primarily reflect Italy’s own weaknesses,” Visco said. He cited the uncertainty surrounding growth, the fiscal-policy stance and the need to resume “a credible path to reduce the burden of public debt on the economy.”

Visco’s remarks cap a week dominated by negative economic news. A report on Thursday showed Italy slipped into its first recession since 2013 in the fourth quarter amid a slump in industry and stagnant services activity.

In Germany, the biggest decline in retail sales in more than a decade in December sparked speculation whether Europe’s largest economy might have succumbed to a recession after all, defying the Federal Statistics Office forecast for “slight” growth in the fourth quarter. Bundesbank President Jens Weidmann has cited the still-unresolved trade dispute between the US and China and the fear of a no-deal Brexit as reasons for weaker momentum at the start of 2019, which will result in downward revision to this year’s growth forecast.

In his Rome speech, Visco said he was also worried about the consequences of higher borrowing costs. Italian yields rose last year amid investors’ uncertainty over the populist government’s fiscal plans.

“A high sovereign risk premium exacerbates the imbalance of the public accounts” and undermines “the capacity of fiscal policy to support the economy,” he said. Banks and insurance companies “also face losses, with repercussions on their funding conditions.”

Prime Minister Giuseppe Conte said the Italian government expects the measures included in its budget to fuel a recovery in the second half of 2019. Still, most economists expect growth this year well below the government goal of 1 percent. That could jeopardize an agreement reached with the European Commission on the government’s fiscal targets, with the risk of new tensions over a possible request by Brussels for additional budget adjustments. — Bloomberg