Economic Bulletin No. 2 - 2022

The global economic cycle weakens; inflation rises further

Global economic activity has shown signs of slowing down since the beginning of the year, owing to the spread of the Omicron variant of the coronavirus and subsequently to Russia's invasion of Ukraine. Inflation has risen further almost everywhere (to 7.5 per cent in March in the euro area), continuing to reflect the increases in energy prices and supply bottlenecks. The effects of the conflict on the global financial markets have been significant, although they have partially eased over the last few weeks. Volatility is high in many market segments. The war is exacerbating downside risks to the global economic cycle and upside risks to inflation.

The ECB reviews its net asset purchases

Last March, the ECB's Governing Council judged that the conflict would have considerable repercussions for economic activity and inflation in the euro area and announced that it would adopt all the measures necessary to guarantee price stability and financial stability. It also revised the purchase schedule of its asset purchase programme (APP) for the next few months and announced that any changes in the key ECB interest rates would take place some time after the end of its net asset purchases and would be gradual.

Italy's GDP falls in the first quarter; inflation rises, driven by energy and food prices

GDP fell in the first quarter of 2022, owing to the resurgence in new COVID cases at the start of the year and to the dynamics of energy prices, against a cyclical backdrop of heightened uncertainty stemming from the developments of the invasion of Ukraine. The growth in the number of new jobs weakened in January and February. Inflation reached 7.0 per cent in March, its highest level since the early 1990s; the core component is still below 2 per cent.

The Bulletin sets out three scenarios on the effects of the war in Ukraine on GDP and inflation in Italy

The possible economic consequences of the conflict are examined in three illustrative scenarios, rather than forecasts, drawn up based on alternative hypotheses for commodity prices, international trade, consumer and business confidence, and natural gas supplies. In the most favourable scenario, which assumes the conflict will be resolved rapidly, and that the associated tensions will be significantly reduced, GDP growth would be around 3 per cent in 2022 and in 2023. In the intermediate scenario, in which the war continues, GDP would rise by around 2 per cent in both years. In the most adverse scenario, which also hypothesizes an interruption in the supply of gas from Russia that could only partly be compensated from other sources, GDP would fall by almost 0.5 percentage points in 2022 and in 2023. Inflation would average 4.0 per cent in 2022 in the first scenario, 5.6 per cent in the second scenario and just below 8 per cent in the third; in all three scenarios, it would reach levels of around 2 per cent in 2023. This wide range of estimates does not take account of any possible new economic policy responses, which will be essential to counter both any recessionary tendencies and any pressures on prices stemming from the conflict.

Some of the gas imports from Russia could be replaced by other sources

The current account surplus remained large in 2021, despite being affected by the worsening energy balance. More than one fifth of Italian imports of energy inputs, and almost half of those of natural gas alone, come from Russia. According to preliminary estimates, any interruption in the natural gas flows from Russia could be replaced by about two fifths by end-2022 - without drawing on Italy's methane reserves - by increasing imports of liquefied natural gas, greater recourse to other suppliers, and stepping up extraction from Italian gas fields. In the medium term, it would be possible to fully replace imports of Russian gas by investing more in renewable sources, as well as by increasing imports from other countries.

Government deficit and debt as a percentage of GDP fall significantly in 2021

Last year, general government net borrowing as a percentage of GDP fell considerably compared with the extraordinarily high levels recorded in 2020. The debt-to-GDP ratio also decreased. At the end of February, the European Commission issued a positive assessment of Italy's fulfilment of the milestones and targets for the first disbursement of funds under the Recovery and Resilience Facility. On 6 April, the Government approved the 2022 Economic and Financial Document. Given the improvement in the current legislation scenario for the public accounts, the net borrowing targets set last September have been confirmed. In 2022, the deficit and the debt will stand at 5.6 and 147.0 per cent of GDP respectively.