Economic Bulletin No. 3 - 2021

The global economy is recovering

With the rapid progress of the vaccination campaigns, global GDP growth has strengthened; the outlook is improving, albeit unevenly across countries. A considerable rise in inflation in the United States reflected supply lagging behind the strong recovery in demand, but to date has not had a significant impact on medium-term inflation expectations. Monetary policy remains expansionary in all the major countries.

The ECB Governing Council continues to support the economy and has reviewed its monetary policy strategy

In the euro area, rising energy prices have led to an increase in inflation, although this should be temporary. Faced with a situation that is generally improving but is still characterized by uncertainty over the course of the pandemic and the re-opening of businesses, the ECB Governing Council confirmed it will maintain extremely expansionary monetary conditions, which are still essential to support the economy and safeguard price stability over the medium term. Under the new monetary policy strategy approved by the Governing Council, especially forceful and persistent expansionary action is required when interest rates are close to their lower bound.

Growth resumes in Italy ...

In Italy, GDP growth was slightly positive in the first quarter, unlike in the other main euro-area countries, where it fell. According to the available indicators, growth gained pace in the second quarter, driven by the stepping up of the vaccination campaign and the gradual easing of restrictions; it is estimated to have expanded by more than 1 per cent compared with the previous quarter. Both a new increase in industrial activity and the beginning of the recovery in services contributed to this.

… driven by investment …

The recovery was driven above all by investment. In our surveys, firms indicate that investment conditions have markedly improved and that they expect investment to pick up during the year. Consumption returned to growth in the second quarter, but the propensity to save remains high, still reflecting precautionary motives.

… and by foreign trade

Italian exports rose in an environment of strengthening world trade. Tourism flows declined in the first quarter; however, mobile telephony data point to a gradual recovery in the number of foreign travellers in Italy since the end of April. Foreign investors’ appetite for Italian securities has been confirmed in recent months. The positive net international investment position increased further.

After falling again, employment increased

The latest available data indicate that employment improved in the spring, with a partial recovery in jobs for young people and women in May and June. Employment had fallen in the first quarter as a result of the marked reduction in private services associated with the resurgence of new COVID-19 cases.

Inflation rises but the core component remains very low

The increase in commodity prices, boosted by the global recovery, was reflected in consumer prices, with inflation reaching 1.3 per cent in June, its highest level in the last three years; excluding energy and food prices, it nonetheless continued to be very weak (0.3 per cent). There is no evidence of further transmission of energy costs to the consumer prices of final goods and services or of a significant pick up in wage growth.

Financial market and credit conditions are relaxed

The accommodative monetary policy stance of the ECB continues to translate into very relaxed financial market and bank lending conditions. Government bond yields remain moderate: the sovereign risk premium is still below the levels recorded before the pandemic. Lending to non-financial corporations and households continued to grow. Aside from debt restructuring requirements and precautionary motives, firms' demand for credit, for the most part backed by state guarantees, reflected their intention to finance the recovery of investment. 

The NRRP is given the green light by the  Council of the EU

The Government introduced new measures to support workers and firms in the second quarter of the year. In mid-July the Council of the European Union approved the National Recovery and Resilience Plan (NRRP) submitted by the Government at the end of April.

Thanks to the improvement in the health situation and to expansionary policies ...

This Bulletin presents the macroeconomic projections for the Italian economy in the three years 2021-23, which update those prepared in June as part of the Eurosystem staff macroeconomic projection exercise. The assumptions underpinning the projections are that the public health situation will continue to improve at both national and global level, that there will be ongoing strong support from fiscal policy - using both national and EU funds - and that favourable monetary and financial conditions will be maintained, as indicated by the Governing Council of the ECB.

... GDP looks set to accelerate from the summer onwards ...

Based on these assumptions, GDP is projected to accelerate significantly starting from the third quarter, with annual average growth currently estimated at 5.1 per cent in 2021, and is forecast to continue to grow in the following two years (at rates of 4.4 per cent in 2022 and 2.3 per cent in 2023). In this scenario, GDP returns to pre-pandemic levels in the second half of 2022.

... with an important contribution from investment 

Contrary to what was observed after the two previous recessions, the recovery will likely be marked by a strong contribution of investment, which is expected to expand rapidly thanks to the outlook for demand, favourable financing conditions, and the support envisaged under the NRRP. In this scenario, at the end of the three-year period, the ratio of investment to GDP regains the levels prevailing before the global financial crisis of 2008-09; after ten years, the ratio of public sector investment to GDP goes back to the European average. Consumption is projected to recover more gradually; inflation is expected to remain low in the next two years, at around 1.3 per cent.

The outlook, however, depends on the effectiveness and timeliness of the measures ...

The scenario presented here is nevertheless heavily dependent on the effectiveness and timeliness of the measures introduced to support and relaunch the economy, which in the projection exercise raise GDP by about 4 percentage points cumulatively over the three-year forecasting horizon. About half of this effect is attributable to interventions under the NRRP. Further stimulus to growth in the years beyond the forecasting horizon could be generated by effects on productivity stemming from the public investment and reforms envisaged under the NRRP.

… and on the course of the pandemic 

The main elements of uncertainty surrounding the outlook for growth are linked to the course of the pandemic (which can affect consumption and investment), to how NRRP-related projects are implemented and to their ability to impact potential growth, as well as to how consumers respond to the re-opening of the economy.  

Risks to inflation are balanced

The risks surrounding the inflation projections are balanced and also depend on price developments in the euro area. On the one hand, persistently ample margins of spare capacity could delay the recovery in wages. On the other hand, persistent action to support economic activity could favour a more rapid return of inflation expectations and wage growth in Italy and the euro area to levels consistent with the definition of price stability.

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