Italy is in for a slow economic recovery and will not reach pre-crisis growth levels until the mid-2020s, the International Monetary Fund (IMF) warned in its latest annual report on the country on Monday.
The euro zone's third-largest economy is gradually recovering after a protracted recession, but a number of structural challenges "remain significant," the IMF said.
"Productivity and investment growth are low; the unemployment rate remains above 11 percent, with considerably higher levels in some regions and among the youth; bank balance sheets are strained by very high NPLs (non-performing loans) and lengthy judicial processes; and public debt has edged up to close to 133 percent of GDP (gross domestic product), a level that limits the fiscal space to respond to shocks," it said in its report.
As a result, Italy's economic recovery was "likely to be prolonged and subject to risks" the fund said. It predicted Italy's GDP would grow by 1.1 percent this year and about 1.25 percent in 2017–18.
"Risks are tilted to the downside, including from financial market volatility, the refugee surge, and headwinds from the slowdown in global trade," the IMF noted.
"This growth path would imply a return to pre-crisis (2007) output levels only by the mid-2020s and a widening of Italy's income gap with the faster growing euro area average. It also implies a protracted period of balance sheet repair and thus of vulnerability."
Italy's economy grew by 0.8 percent in 2015, according to the country's statistics body ISTAT, after experiencing a triple-dip recession since the financial crisis.
Italy's banking worries
Italy's banks have concerned investors for several years due to the high volume of NPLs on their balance sheets, estimated to be worth 360 billion euros ($396 billion). Italy is currently negotiating with its European partners over how to recapitalize its banking sector. New European banking rules require depositors to be "bailed-in" to any bank rescues, but the Italian state may want to use public finances – breaching EU rules.
Italy's political scene looks vulnerable too.
Prime Minister Matteo Renzi has staked his leadership on a referendum on constitutional reform in October. The vote is aimed at reforming the Italian Senate and breaking the persistent deadlock between the lower and upper houses of parliament that has made lawmaking and reform a difficult process.
Renzi has said he will resign if the referendum fails, leading to a leadership vacuum that may prove reminiscent of the U.K. following its vote to leave the European Union.
Italy has seen three prime ministers in the last three-and-a-half years and the rapid change of leadership has hampered attempts to reform its economy.
On Monday, the IMF praised the Italian authorities for embarking on what it called "a range of very important reforms, including institutional, public administration, fiscal, labor market, and banking sector reforms" and said it was "imperative that these efforts are fully carried out and deepened."
"Taking advantage of the start of economic recovery and the current favorable tailwinds of monetary easing, low commodity prices and fiscal support, the timely implementation of complementary and mutually reinforcing efforts in the financial and fiscal sectors and structural measures would help boost growth, lower the upfront cost of reforms, and accelerate the building of buffers," it said.
The IMF's directors underscored that financial sector reforms "are critical to entrench financial stability and support the recovery."
"To substantially reduce the stock of NPLs over the medium term, lower the cost of risk, and improve operating efficiency, (the fund's directors) supported further measures, including more intensive use of out-of-court debt restructuring mechanisms; strengthened supervision; and a systematic assessment of asset quality for banks not already subject to the ECB (European Central Bank) comprehensive assessment, with follow-up actions in line with regulatory requirements."