Economic Bulletin No. 4 - 2021

The global recovery continues but supply constraints emerge

The global recovery continues at a strong pace, although there are uncertainties over the progress of vaccination campaigns and the spread of new variants of the virus. Trade has returned to the levels prior to the outbreak of the pandemic, but tensions have emerged over supplies of commodities and intermediate inputs, partly due to the rapidity of the recovery. The increase in inflation in the United States has come to a halt; however, the bottlenecks in supply could affect prices for longer than initially expected.

ECB monetary policy remains expansionary 

In the euro area, growth continues to be robust, although the consequences of the public health emergency have not all been reabsorbed. The significant rise in inflation is attributable to the increases in energy prices and to temporary factors. Pressure on prices will build over the next few months, also because of the marked increase in natural gas prices; nevertheless, the key determinants, such as wage growth, have not so far pointed to high inflation persisting in the medium term. The ECB Governing Council has confirmed the strongly expansionary stance of monetary policy: it believes that maintaining favourable financial conditions is essential to support the recovery.

Growth exceeds expectations in Italy

GDP growth in Italy, which in the second quarter far exceeded expectations, appeared to continue during the summer months. According to the available indicators, industrial production grew by around 1 percentage point in the third quarter and GDP by more than 2 per cent. Wider vaccination coverage and the increase in mobility have allowed households’ consumption of services to resume, which has accompanied the ongoing recovery in investment.

Households and firms’ confidence improves ...  

Our surveys show that households' expectations concerning the general state of the Italian economy have improved overall; the propensity to spend in the sectors hardest hit by the pandemic, including hotels, bars and restaurants, is also picking up. Nevertheless, caution still persists in the outlook for spending, especially in less well-off households. Firms reiterated their very favourable assessments of investment conditions. 

...  as does the performance of exports

The growth in Italian exports, which was robust and greater than that of world trade in the second quarter, continued in the third quarter. Foreign tourists' spending in the summer was significantly higher than in the year-earlier period, though still below 2019 levels. Purchases of Italian securities as portfolio investments by non-residents continued.

Employment rises but there is still labour market slack

In the spring, the improvement in the economic situation translated into considerable growth in employment, especially for fixed-term contracts, and in hours worked. The number of employed persons rose again in July and August, albeit at a slower pace. The effects of the pandemic crisis have not been entirely overcome, and there are still signs of labour market slack: recourse to wage supplementation schemes remains widespread, though much lower than the peak levels of 2020, and the labour market participation rate is below the levels of two years ago.

Energy costs drive up inflation 

Inflation reached 2.9 per cent in September, driven up by the strong growth in energy prices. According to the macroeconomic projections, the rise is not expected to extend over the medium term: the recent contractual agreements do not suggest any strong upturn in wage growth so far. Firms report that they have revised upwards their growth expectations for their selling prices, which nevertheless still remain below 2 per cent a year.

Growth in lending weakens

The growth in lending to non-financial corporations declined over the summer, owing to less request for funding by firms. This was influenced by both the abundant liquidity accumulated and the brighter economic situation, which led to a recovery in cash flows. Credit supply conditions remain relaxed.

Growth forecasts for 2021 have been revised upwards

Overall, these data have led most observers to revise their forecasts for growth in Italy upwards for the current year. Based on our current assessments, the increase in GDP should be around 6 per cent, considerably higher than was estimated in the Economic Bulletin in July.

The Government updates the 2021 public accounts estimates …

The Government has updated the public accounts estimates and the budget objectives for the next three years. In 2021, it is expected that net borrowing will reach 9.4 per cent of GDP (from 9.6 per cent in 2020) and the debt-to-GDP ratio will stand at 153.5 per cent (from 155.6 per cent). In contrast to what was planned in the spring, this scenario foresees an improvement in the accounts compared with 2020. The new estimates reflect higher than expected GDP growth and considers, among other things, some favourable elements that have emerged from the monitoring of general government's revenue and expenditure.

… and the objectives for the next three years

The Government's plans indicate that the ratios of net borrowing and debt to GDP will continue to decline gradually over the next few years, albeit less so than in the current legislation scenario owing to expansionary measures that will be set out in the next budgetary package. Compared with the current legislation scenario, the budget would raise the deficit by 1.3 percentage points of GDP on average in the next three years. In 2024, the deficit and the public debt are expected to come down to 3.3 and 146.1 per cent of GDP respectively.

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