Italy to remain in recession until late 2013, OECD warns

Weakened European economies and the short-term consequences of fiscal tightening will mean that Italy remains in recession until 2013, says a new report from the OECD.

Recession in Italy will persist despite the significant structural reforms introduced in late 2011 by Prime Minister Mario Monti.

“Activity seems likely to continue to decline over the next year but will turn up in late 2013,” said OECD chief economist Pier Carlo Padoan. Planned spending cuts and tax increases should further reduce the deficit to a very low level in 2013 and are on track to eliminate it in 2014.

“Some additional fiscal action may be needed, given the projected recession but prudent government assumptions about revenues from anti tax-evasion measures provide a safety margin. Structural reforms have already boosted longer-term prospects and must continue. Reductions in real wages to bring them more in line with productivity would boost competitiveness and contain unemployment,” the report said.

The OECD has cut its growth forecasts for the eurozone, warning that the debt crisis in the area could pull it into a vicious downward spiral without the right policy action.

“The crisis in the euro zone remains the single biggest downside risk facing the global outlook,” said Padoan.

At European level, Padoan warned that failure to act immediately could lead to a worsening of the European crisis and spill-overs beyond the euro area, with serious consequences for the global economy.

“Avoiding such a scenario requires action to be taken both at country and supranational level.”

Fiscal consolidation and structural measures must proceed hand in hand, to make the adjustment process as growth-friendly as possible. The reform agenda must also be specifically targeted at supporting employment, reducing inequalities and protecting the weakest segments of the population,” the report said.

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