Economic Bulletin No. 1 - 2021

The new pandemic wave is impacting the recovery, but vaccinations have begun

The resurgence of coronavirus cases in the autumn led to a slowdown in global economic activity at the end of 2020, especially in the advanced countries. The start of the vaccination campaigns is affecting the medium-term prospects favourably, but the timing and intensity of the recovery remain uncertain

The ECB Governing Council will continue to support the economy

In the euro area, the effects of the pandemic on economic activity and on prices are set to last longer than was previously assumed. The ECB Governing Council has expanded and prolonged monetary stimulus to ensure favourable lending conditions for all sectors for as long as necessary to guarantee full support to the economy and to inflation. It stands ready to recalibrate its instruments once again if necessary.

In Italy, a marked recovery in GDP is followed by a drop at the end of 2020 ...

In Italy, the higher than expected growth in the third quarter demonstrated the economy's strong capacity to recover. As in the other euro-area countries, the second pandemic wave nevertheless caused a further decrease in GDP in the fourth quarter. Based on the available indicators, this decline can currently be estimated at around -3.5 per cent, although there is a great deal of uncertainty over this figure.

... mainly in services ...

The downturn was considerable in services and marginal in manufacturing. Our surveys reveal that firms' assessments have become less favourable, but are still far from the pessimism registered in the first half of 2020. Firms intend to step up their investment plans for 2021. According to the households interviewed by the Bank of Italy, spending on services continues to be held back by fears of infection more than by the restrictive measures.

... but exports and capital inflows have resumed ...

Italian exports of goods and services recovered significantly in the third quarter of 2020, far more so than world trade; this continued in the autumn, but less markedly. Capital flows and purchases of Italian public sector securities by non-residents started up again. The Bank of Italy's TARGET2 balance improved. Thanks to the protracted current account surplus, Italy's net international investment position turned positive after more than thirty years of negative balances.

The recovery in employment weakens after the summer

With the reopening of the activities suspended during the first wave of the pandemic, in the third quarter the number of hours worked rose sharply and recourse to wage supplementation schemes declined. The number of payroll employment positions also returned to growth. However, the latest available data indicate another upturn in the use of the wage supplementation scheme (CIG), albeit much less so than during the first wave. In November, the increase in the number of new jobs essentially came to a halt, highlighting a gap compared with the same period of the previous year, particularly for young people and women.

Weak demand keeps prices down

The change in consumer prices remained negative, reflecting price developments in the service sectors hit hardest by the crisis, whose growth continues to be affected by the weakness of demand. The inflation expectations of analysts and firms continue to point to very low rates over the next twelve months.

There is greater optimism on the financial markets

The optimism of financial market operators in Italy and abroad has been boosted by the announcement of the rollout of vaccines, further monetary policy and fiscal support, and the end of the uncertainty surrounding the presidential elections in the United States. The yield spread between Italian and German ten-year government bonds remains at lower levels than those observed before the healthcare crisis. Financial markets nevertheless remain sensitive to the course of the pandemic.

Lending continues to grow at a sustained pace

Banks continued to meet demand for funds from firms. Supply conditions remained relaxed overall, thanks to the continuing support of monetary policy and public guarantees. Banks' bond funding costs declined further, and rates on lending to firms and households remained low.

The Government has adopted further support measures

In response to the resurgence of the health crisis, the Government enacted additional measures to support households and firms in the last quarter of 2020. Compared with the scenario at unchanged policies, the budget envisages an increase in net borrowing both this year and the next. Further expansionary stimulus should come from the measures that will be defined under the Next Generation EU (NGEU) programme.

This Bulletin updates the macroeconomic projections for Italy

This Bulletin presents the macroeconomic projections for the Italian economy in the three years 2021-23, which update those prepared in December as part of the Eurosystem staff macroeconomic projection exercise. The baseline projections presented here assume that the pandemic gradually comes under control in the first half of this year and is completely resolved by the end of 2022; that the substantial support from fiscal policy, reinforced by the use of funds available under NGEU, continues; and that monetary policy ensures that financial conditions remain favourable over the entire forecasting horizon, as envisaged by the ECB Governing Council.

GDP is expected to return to robust growth from the spring onwards ...

Based on these assumptions, it is projected that GDP will return to significant growth starting in the spring, estimated at 3.5 per cent on average this year, 3.8 per cent in 2021, and 2.3 per cent in 2023, when output would be back to pre-pandemic levels. Investment is projected to pick up at a rapid pace, benefiting from the stimulus measures, with exports staging a significant recovery; consumption is instead projected to recover more gradually, with an only partial inversion of the large increase in the propensity to save observed since the outbreak of the pandemic. Inflation is projected to remain low throughout the year and to then rise only gradually in the two years 2022-23.

... after falling at the end of 2020 ...

The estimate for growth this year is heavily dependent on the negative carryover from the expected decline in GDP in the latter part of 2020. Compared with the projections in July's Economic Bulletin, the pace of activity is instead projected to be more robust from the second quarter onwards and significantly stronger in 2022, thanks to the stimulus provided by the support measures.

... but persistently high risks must be countered

Achieving these rates of growth depends on the expansionary effects of the interventions under NGEU being deployed in full, on support measures preventing firms' rising indebtedness from having repercussions on financial stability, and on contagion fears not deepening again. Growth could instead be higher if faster progress were to be made in limiting the spread of the coronavirus.

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