Global growth weakens and inflation remains exceptionally high
In the third quarter, global economic activity continued to be affected by the very high inflation, worsening financial conditions, the uncertainty linked to the conflict in Ukraine and weak economic activity in China. The price of natural gas in Europe reached new heights in August and decreased after the storage targets were met, though remaining very high. Oil prices fell owing to the widespread deterioration in the economic situation. The latest forecasts by international institutions expect global growth to weaken further next year, with risks tilted to the downside.
The normalization of monetary policies accelerates
In July and September, the Federal Reserve decided on two further sizeable increases in its benchmark rate and confirmed the need to maintain a restrictive monetary policy stance until inflation is brought back in line with the target. The ECB Governing Council increased the key interest rate by 1.25 percentage points overall in its July and September meetings. In July, the Council also introduced a new Transmission Protection Instrument (TPI) to counter financial market fragmentation in the euro area. The mid-June announcement on the new instrument and on the flexible reinvestment of the redemptions coming due under the pandemic emergency purchase programme (PEPP) helped to curb the yield spreads between the government bonds of the countries most exposed to tensions on the sovereign debt markets and German bonds, as well as their responsiveness to changes in the expectations of rises in official interest rates.
GDP in Italy may have slightly decreased in the third quarter
According to the central value of our estimates, GDP declined marginally in Italy in the summer quarter. The slight fall in industrial production was accompanied by signs of weakening in construction. In contrast, activity in the service sector likely remained stable, thanks to the still positive contribution of the tourism and leisure sectors. On the demand side, household spending was curbed by the loss of purchasing power due to the high inflation. Firms reported greater pessimism over investment conditions because of the persistent uncertainty linked to the course of the war in Ukraine. Signs emerged of a slowdown in employment.
Inflation rises again, partly contained by government measures
Inflation reached 9.4 per cent in September, as it continued to be affected by the exceptional rises in energy prices and by their pass-through to the prices of other goods and services. We estimate that the government measures to mitigate the impact of rising energy costs on the financial position of households and firms lowered inflation by about 2 percentage points in the third quarter, in line with the estimates for the second quarter.
The cost of bank loans increases slightly and financial conditions worsen
The surveys of banks point to a further tightening of their supply policies, confirmed by the more stringent credit access conditions reported by firms in the latest business surveys. The increase in policy rates was only partly passed on to the cost of borrowing for firms and households, which remains still low overall. Financial market conditions have worsened, amid persistent inflationary pressures, the accelerated normalization of monetary policies and a deteriorating business cycle. Government bond yields have gone up, especially on short maturities; the spreads of Italian sovereign bond yields vis-à-vis the ten-year German Bund have widened compared with July.
The growth outlook weakens and inflation is more persistent
According to our latest estimates, in a baseline scenario GDP will rise by 3.3 per cent this year overall, slow to 0.3 per cent in 2023 and grow by 1.4 per cent in 2024. Consumer price inflation is expected to equal 8.5 per cent on average in 2022, to decline to 6.5 per cent in 2023, and to reach just above 2 per cent in 2024. In an adverse scenario - which assumes the interruption of Russian gas supplies starting from the last quarter of 2022, further energy price increases and a sharper slowdown in world trade - GDP is projected to contract by over 1.5 per cent in 2023 and turn moderately upwards in 2024. Inflation is expected to continue to rise next year too, to more than 9 per cent, and then fall sharply in 2024.
