The risks to world growth and the inflationary pressures increase
Global economic activity slowed in the second quarter. The prices of energy commodities have recorded further considerable increases, leading to new peaks in inflation. The economic cycle is affected by the repercussions of the war in Ukraine, the erosion of households' purchasing power due to inflation, and the effect of heightened uncertainty on private investment. International financial market conditions have worsened.
The normalization of monetary policy continues
The Federal Reserve has stepped up the normalization of monetary policy, by raising the target range for the federal funds rate significantly and repeatedly. At the end of June, the European Central Bank's Governing Council ended its net purchases under the asset purchase programme (APP) and announced its intention to proceed, in the next meeting in July, with an initial increase in the key interest rates, to be followed by a second increase in September. Moreover, given the sharp rises in the spreads of some sovereign securities and the related risks to the smooth functioning of the monetary policy transmission mechanism, it decided to reinvest maturing securities under the pandemic emergency purchase programme (PEPP) flexibly; it also announced an acceleration in the work on a new instrument for countering market fragmentation. The dollar continued to appreciate against the euro, reaching parity in the first half of July.
Italy's GDP accelerates in the second quarter
According to our estimates, GDP growth in Italy, which was barely positive in the first quarter, was around half a percentage point in the second quarter. Household consumption benefited from the easing of the restrictions introduced to counter the pandemic. Investment and exports continued to rise, though at a slower pace than at the beginning of the year. Employment continued to recover in the spring, though there are signs of a slowdown.
Inflation rises further, driven by energy and food prices
Inflation rose above 8 per cent in June, driven by the exceptional increases in energy prices, which have gradually passed through to food and service prices. The resulting reduction in purchasing power, which is hitting the least well-off households hardest, was mitigated by the measures taken by the Government to assuage the impact of rising energy prices.
Credit access and financial market conditions worsen
The surveys of banks point to some degree of tightening in their credit supply policies, confirmed by the deterioration in access conditions perceived by firms. Financial markets in Italy have been affected by the acceleration in monetary policy normalization and the deterioration in the economic growth outlook. Ten-year government bond yields and the spread with respect to the corresponding German Bund widened, at a time of high market volatility. However, the abrupt increase in the spread does not seem justified by the underlying macroeconomic conditions.
In the baseline scenario, GDP is projected to continue to grow in the next two years
The projections for the Italian economy presented in this Economic Bulletin for the three-year period 2022-24 update those prepared as part of the Eurosystem staff macroeconomic projections published on 10 June. In the baseline scenario, which assumes that the conflict in Ukraine will continue through all of 2022, without however leading to a total interruption in energy supplies from Russia, GDP is projected to increase by 3.2 per cent in 2022, 1.3 per cent in 2023, and 1.7 per cent in 2024. Inflation is projected to be equal to 7.8 per cent on average this year and to decrease progressively to 2.0 per cent in 2024.
If energy supplies from Russia were cut off, GDP growth would come to a halt
The adverse scenario assumes that energy supplies from Russia are cut off, leading to interruptions in production in some industrial activities, steeper rises in commodity prices, a greater impact on uncertainty and confidence, and weaker growth in foreign demand. Net of the effects of any economic policy response, in this scenario GDP would rise by less than 1 per cent in 2022 and fall by almost 2 percentage points next year, returning to positive growth only in 2024. Inflation over the next two years is projected to be higher than in the baseline scenario.
