Italy recovery 'fragile and uncertain' says bank

Low inflation poses risks to economy, warns Visco

(ANSA) - Rome, May 30 - Italy's recovery from its longest and most severe post-war recession remains "fragile" and continuing low inflation is posing a risk to recovery, Bank of Italy Governor Ignazio Visco said Friday. Speaking shortly after the latest statistics showed inflation fell in May to only 0.5% from 0.6% in April, Visco said that such weak price pressures aren't good for the economy and will likely press the European Central Bank (ECB) into action. "This is not consistent with our definition of price stability," Visco told the Bank of Italy's annual general meeting in Rome. "If this pattern is confirmed the (ECB) Governing Council is determined to act, even with unconventional policies," said Visco, who is a member of the ECB's governing council.

The ECB aims to maintain inflation at about 2% over the medium term and has warned that if that inflation continues to fall, it will take action that could include unconventional measures at its upcoming policy meeting next week. Low inflation is particularly harmful to an economy where debt is high and growth is sluggish, as is the case in Italy, he said. The fallout from the painful recession that Italy has suffered is "heavy," said Visco. And the effects are still being felt - "the exit is troublesome and the road to recovery is still fragile and uncertain, and it will not be short nor easy," said Visco. "A real recovery is struggling to get under way," he added.

Italians were dealt a harsh blow earlier this month when national statistical agency Istat reported that the country's gross domestic product (GDP) fell by 0.1% in the first quarter of this year rather than showing growth, as expected. The implication is that the economy is not yet in recovery. Part of that recovery will involve cleaning up the national books, including such "unavoidable" measures as cutting Italy's huge debt, said Visco. "The reduction in the ratio of debt to GDP remains the unavoidable challenge for our country: its speed depends on the return to a stable and sustained growth," he said. Italy's debt-to-GDP ratio is the second largest in the eurozone next to Greece, at approximately 133%. Visco added that "significant results" have been achieved and "we are close to a structural balance of public finances".

Italian Premier Matteo Renzi's tax bonus of 80 euros per month is a "good" move, but labor reforms are greatly needed to help boost economic recovery and growth, said Visco. However, wary consumers who cannot afford to spend or are afraid to open their wallets can "drag down the benefits of the recently approved tax cuts like the 80-euro bonus," said Visco. And the most important factor in boosting consumer confidence is jobs. "(Consumers) will not become the driving force of recovery without a sustained increase in employment," he said.

To try to help small- and medium-sized businesses (SMEs), often a key driver of growth and jobs, the Bank of Italy will soon have in place new lending measures for commercial banks that will target that sector, he said. The program will help banks to allocate lines of credits, create more flexible collateral management programs, and other measures aimed at getting more money flowing to SMEs, said Visco.