(Finance) – “In the updated baseline scenario for the three-year period, GDP growth stands at 1.3 per cent this year, 0.9 per cent in 2024 and 1.0 per cent in 2025. In the coming quarters the recovery would be affected by the tightening of financing conditions and the weakness of international trade. Investments would slow down, only partially supported by the implementation of the projects envisaged in the National Recovery and Resilience Plan. Inflation would reach 6.0 per percent on average this year and would drop to 2.3 in 2024 and 2.0 in 2025, reflecting the direct and indirect effects of the drop in energy commodity prices. percent on average for the current year, would reach 2.0 percent at the end of the three-year forecast”. This is the picture drawn by Bank of Italy In the July economic bulletin which updates, with some downward adjustments for 2024-2025, the estimates released last month.
Global economic recovery falters – Global economic activity is held back by high inflation and tight financing conditions. In the United States, output decelerates and in China the recovery of activity is losing momentum again, after having benefited from the removal of pandemic containment policies. Despite the lively dynamics of services in the major economies, activity was affected by the weakening of the manufacturing cycle, which contributes to reducing the growth prospects of international trade and the prices of raw materials and energy products. The lower contribution from the energy component corresponds to the decline in consumer price inflation in the major industrial countries, with the exception of Japan. Core inflation, however, is still struggling to fall.
Monetary tightening continues in major advanced economies – After a hike in May, the Federal Reserve kept key interest rates unchanged in June, while signaling the possibility of raising them in the coming months. The Bank of England stepped up its restrictive action, with a 50 basis point increase in rates in June. After the turmoil associated with the episodes of the banking crisis in the United States and Switzerland, conditions in the international financial markets have normalised.
Cyclical weakness continues in the euro area and inflation falls – In the first quarter of this year, the product decreased slightly in the euro area for the second consecutive quarter and, according to Bank of Italy estimates, stagnated in the spring. The further decline in manufacturing activity was offset by the expansion in services. Employment growth continued and wage dynamics intensified. Consumer price inflation has fallen further, but underlying inflation remains high. In the projections of Eurosystem experts, consumer price inflation is expected to stand at 5.4 per cent in 2023, to then gradually decrease to 2.2 per cent in 2025.
The ECB has raised the official rates again – Between May and June, the Governing Council of the European Central Bank raised the key interest rates by a total of 50 basis points. Decisions on rates will continue to be taken, on a case-by-case basis, taking into account the data that will gradually become available, in order to achieve a timely return of inflation to the medium-term objective of 2 per cent. The Board also confirmed the end, starting from the month of July, of reinvestments within the framework of the financial asset purchase programme, as well as the full reinvestment, with flexibility, of the principal repayments on maturing securities within the framework of the due to the pandemic emergency, at least until the end of 2024. In the euro area, yields on ten-year government bonds rose slightly, while the trend in differentials with the corresponding German bond was heterogeneous between countries: for Italy is diminished.
In Italy, GDP growth would have stopped in the spring – After the rebound in the first quarter, according to Bank of Italy estimates, the product remained virtually unchanged in the spring, above all due to the contraction in manufacturing activity, which is being weighed down by the weakening of the global industrial cycle. The expansion of household consumption continued at a slower pace. Investments are held back by the tightening of financing conditions and less favorable demand prospects.
The current account balance improves, which benefits from the trend in the cost of energy goods – Since the beginning of the year, export volumes have declined, reflecting the weakness in world trade. However, the current account balance improved, also thanks to the trend in energy imports, which benefited from the reduction in international prices; the energy deficit would decrease overall by 2023. Foreign investors have shown strong interest in Italian portfolio securities. The negative balance of the Bank of Italy on the TARGET2 European payment system decreased. The net foreign position remains creditor.
Employment continues to grow, wage dynamics strengthen and profit margins increase slightly – The expansion of the number of employed people continued, exceeding the pre-pandemic values. The participation rate continues to rise; that of unemployment decreased, settling below 8 per cent. The growth in wages, which intensified as a result of the payment of substantial arrears due to delays in renewals in the public sector, is expected to strengthen in the remainder of the year, although remaining lower than the rise in prices. In some sectors of industry, wage growth will also be supported by the adjustment to inflation envisaged by the indexation clauses. Profit margins are slightly increasing, albeit with marked differences between sectors: in manufacturing they have returned to their pre-health crisis values, while in construction and services they are still lower.
Consumer price inflation continues to decline – In the spring, consumer price inflation fell further, thanks to the decisive decrease in the energy component, albeit remaining at high levels. There have been the first declines in inflation for food and non-energy industrial goods, which are starting to incorporate the sharp decline in energy input prices. In June, the prices of services also showed some signs of a slowdown. Households and businesses expect a further easing of inflationary pressures.
Bank loans are reduced and the cost of credit increases – Between February and May, loans to the non-financial private sector decreased again; the rise in the cost of credit, the lower need for financing for investments and the progressive tightening of supply conditions contributed to this. The latter are affected by the higher perception of risk and the lower tolerance towards it by the intermediaries. The credit deterioration rate remained contained, while the incidence of the flow of loans with late payments increased.
Projections are surrounded by elevated uncertainty, with downside risks to growth – The macroeconomic picture continues to be characterized by strong uncertainty. The risks for growth are oriented to the downside and linked in particular to the evolution of the conflict in Ukraine and to the possibility of a greater tightening of financing conditions than expected. Conversely, the risks to inflation are balanced and include, on the upside, an incomplete pass-through of the recent drop in energy prices and, on the downside, a more marked and lasting deterioration in aggregate demand; the risks of a wage-price spiral remain contained.