The global economy shows signs of improvement, driven by the US
The global economy showed signs of strengthening in the early months of the year, more widespread in services. In the United States, consumption stayed particularly strong and employment growth exceeded expectations; aggregate demand instead remained weak in China, in part due to the ongoing property crisis. According to the latest IMF estimates, global GDP is expected to continue to grow by just over 3 per cent in 2024, held back by tight monetary policies. The tensions in the Middle East have so far had a limited impact on goods trade. According to our estimates, world trade will expand by 2.4 per cent this year, less than global GDP. The risks to the global economy are tilted downwards and are related to the possibility that the ongoing conflicts may escalate.
The monetary policy stance remains restrictive in the US and the UK
Disinflation came to a halt in the United States in the early months of the year. In March, the Federal Reserve and the Bank of England kept their policy rates unchanged and announced that their monetary policy stance will remain restrictive until the decline in inflation firms up. The Bank of Japan has increased its official rates for the first time since 2007, bringing them into positive territory, and has ended its yield curve control strategy. Investors have postponed their expectations of when monetary easing will begin in the United States. Despite rising bond yields, financial conditions in key advanced economies remain relaxed.
In the euro area, economic activity stagnates and disinflation continues
At the beginning of 2024, euro-area GDP continued to stagnate owing to a weak industrial sector, while there were signs of a recovery in the service sector. Consumer price inflation has stayed on its downward path, especially for food and non-energy industrial goods, while in services it has remained at high levels. The indicators that estimate the underlying price dynamics, net of the most volatile components, have dropped considerably since early 2023. According to our assessments, the recent price increases in maritime transport due to the tensions in the Red Sea are not expected to lead to any significant inflationary pressures. The ECB staff projections released in March indicate that euro-area inflation will decline to 2.3 per cent this year, returning to a level consistent with its target in 2025 and 2026.
The ECB keeps its key interest rates unchanged and reviews its monetary policy framework
In April, the ECB Governing Council decided to keep its key interest rates unchanged and announced that it would be appropriate to reduce the current level of monetary policy restriction if the Governing Council's updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner. Following the review of its monetary policy framework, the Governing Council will continue to steer monetary policy by adjusting the Eurosystem deposit facility rate.
In Italy, the cyclical weakness of economic activity extends to the first quarter of 2024
According to our estimates, economic activity in Italy grew modestly in the first quarter of 2024, still held back by weak manufacturing, while services regained ground. Sluggish consumption, which is expected to recover only partially from the decline at the end of last year, appears to have been accompanied by a slight increase in private investment, supported by internal funding.
The current account balance remains positive
The current account balance remained in surplus in the fourth quarter of last year; the improvements in the goods and services balances more than offset the deterioration in the investment income balance, which was affected by the rise in the ECB's key interest rates underway since July 2022. Italy's net international investment position, which has strengthened further, is positive overall but negative for the items that are most affected by the reference rates. Non-resident investors continued to make net purchases of public and private sector debt securities.
The employment rate remains high and wages are gradually picking up
After rising strongly at the end of last year - especially in services and construction -employment remained stable in the first two months of 2024, though permanent employment continued to grow. The unemployment rate remains at historically low levels. Labour costs are expected to pick up pace during the year, buoyed by both recent and forthcoming renewals of collective bargaining agreements, especially in the service sector. Profit margins - which are still high, particularly in services - are giving firms the leeway needed to absorb future wage increases without triggering inflationary pressures.
Core inflation declines further
In the first quarter, consumer price inflation remained subdued; core inflation declined further, owing to the sharp slowdown in goods prices and a milder deceleration in services. Firms and households revised their short- and medium-term inflation expectations downwards. Notwithstanding the tensions in maritime trade in the Red Sea, the prices of intermediate goods continued to fall.
The monetary restriction continues to be transmitted to lending
The cost of lending remains high, still dampening the demand for loans by firms and households. Banks' high risk perception is contributing to keeping credit standards strict. Bank funding continues to decrease: the decline in current account deposits and Eurosystem refinancing has been only partly offset by the increase in other deposits and bond funding.
The Government approves the 2024 Economic and Financial Document
In 2023, general government net borrowing decreased to 7.2 per cent of GDP; the fall was less than projected last autumn because of the higher costs for the Superbonus. The debt-to-GDP ratio fell by around 3 percentage points to 137.3 per cent, thanks primarily to the favourable trend in the gap between the average cost of debt and nominal GDP growth. The Government approved the 2024 Economic and Financial Document, which -in the light of the reform of the European fiscal rules currently underway - presents developments in the public accounts based solely on a current legislation scenario. Net borrowing is projected to fall, down to 2.2 per cent in 2027; the debt-to-GDP ratio is expected to rise by a total of 2.5 percentage points in 2024-26, owing to the cash impact of the building renovation tax credits accrued in recent years, and to then fall marginally in 2027.
Over the next two years, growth is projected to pick up pace and inflation to stay below 2 per cent
Based on our projections, GDP is expected to grow by 0.6 per cent in 2024 (0.8 per cent not adjusted for calendar effects), 1.0 per cent in 2025 and 1.2 per cent in 2026, benefiting from the recovery in real wages and foreign demand. Inflation is projected to fall to 1.3 per cent this year, mainly reflecting the negative contribution of the energy component, and to rise up to 1.7 per cent over 2025 and in 2026. Core inflation, buoyed by unit labour cost dynamics, will stand at 2 per cent on average this year and decline to 1.7 per cent over the next two years. The risks to growth are tilted to the downside and stem from the possibility that the impact of the ongoing monetary tightening may be stronger than expected, that the phasing out of incentives for residential building renovation could lead to a sharper-than-expected correction in construction, and that global trade may remain weak for longer than anticipated. The risks to inflation, instead, are balanced.
