Economic Bulletin No. 1 - 2023

The global economy shows signs of weakness; energy prices fall

In the fourth quarter of 2022, the global economic outlook continued to be affected by the repercussions of the war in Ukraine, high inflation and weakening economic activity in China. The slowdown in global demand contributed to moderating the price of oil. Natural gas prices have fallen sharply in Europe thanks to the mild temperatures, the reduction in the demand for industrial use, and the considerable stocks accumulated. Based on their latest forecasts, international institutions expect global growth to weaken this year.

The main central banks continue to raise official interest rates, though at a slower pace

In November and December 2022, the Federal Reserve and the Bank of England decided to raise their respective reference rates further. At its meetings of October and December 2022, the ECB Governing Council raised its key interest rates by 75 and 50 basis points respectively and announced that they will still need to rise significantly in order to support a timely return of inflation to its medium-term target. The Council also published the criteria it will use for normalizing the Eurosystem’s monetary policy securities holdings.

Economic activity in Italy is likely to have weakened in the fourth quarter

Our estimates suggest that economic activity in Italy weakened in the last quarter of 2022, due to both the waning recovery in services, where value added had already regained pre-pandemic levels in the summer, and the decline in industrial production. Household spending appears to have slowed. The firms taking part in the Bank of Italy’s surveys consider that investment conditions are still unfavourable. After remaining unchanged over the summer, there are indications of a slight rise in employment in October and November. Wage growth remains moderate.

Inflation remains high, still mainly driven by energy

Harmonized consumer price inflation stood at 12.3 per cent in December on an annual basis, still buoyed by the energy component, which continues to pass through to the prices of the other goods and services. According to our estimates, which include both direct and indirect effects, energy accounted for just over 70 per cent of overall inflation on average in the fourth quarter. The government’s energy-related measures appear to have mitigated consumer price growth by more than 1 percentage point over the same period.

The cost of bank lending continues to rise

Between August and November, bank lending to the non-financial private sector slowed, reflecting weaker demand from firms for investment purposes and from households for house purchase. Credit supply conditions tightened moderately. The increase in key interest rates was passed on to the cost of bank lending, broadly in line with the average increase in the euro area. Financial market conditions have improved overall since mid-October. In mid-January, the yield spread between Italian and German government bonds stood at around 185 basis points, well below the highs reached during 2022.

The growth outlook weakens and inflation is projected to fall to 2 per cent in 2025

Based on our latest projections – which continue to be purely indicative, given the current environment of high uncertainty, stemming above all from the ongoing conflict in Ukraine – in the baseline scenario, after an increase in GDP of almost 4 per cent in 2022, growth will weaken to 0.6 per cent in 2023, and strengthen again in the following two years. Consumer price inflation, which rose to almost 9 per cent last year, is projected to decline to 6.5 per cent in 2023 and at a faster pace thereafter, reaching 2,0 per cent in 2025. Under an adverse scenario that assumes a permanent suspension of the supply of gas from Russia to Europe, GDP would fall in 2023 and 2024, and would grow moderately the following year. Consumer price inflation would rise further this year, before declining markedly in the next two years.