Economic Bulletin No. 1 - 2022

The recovery strengthens in the United States and other advanced countries ...

Following the widespread slowdown in the third quarter, signs emerged of a return to stronger recovery in the United States and other advanced countries at the end of last year, in contrast to a prolonged weakness in the emerging economies. However, the resurgence of the pandemic and the persistent bottlenecks on the supply side are creating downside risks to growth. Inflation has risen further almost everywhere, mainly as a result of the increases in the prices of energy products and intermediate inputs and of the recovery of internal demand. The Federal Reserve and the Bank of England have begun to normalize their monetary policy.

... while it has slowed in the euro area

In the euro area, GDP instead decelerated sharply at the turn of the year, owing to the rise in the number of COVID cases and the ongoing tensions in the supply chains that are holding back production in manufacturing. Inflation has reached its highest level since monetary union began, because of the exceptional increases in the energy component, especially gas prices, which in Europe are also affected by geopolitical factors. According to the Eurosystem staff projections published in December, inflation will gradually decrease in 2022, reaching 3.2 per cent on average this year and 1.8 per cent in the two years 2023-24.

The ECB has decided to reduce purchases gradually and to maintain an accommodative monetary policy

The ECB Governing Council judges that the progress on economic recovery and towards its medium-term inflation target permits a step-by-step reduction in the pace of its asset purchases. The Council also reiterated the need for the monetary policy stance to remain accommodative and to maintain flexibility and optionality in the conduct of monetary policy in relation to the evolving macroeconomic outlook.

GDP decelerates sharply in Italy too

Growth in Italy remained high in the third quarter of 2021, driven by the increase in household consumption. GDP subsequently slowed: based on the Bank of Italy’s models, it grew by around half a percentage point in the fourth quarter. The growth in value added weakened in both industry and the service sector.

The rise in COVID cases makes consumers more cautious

The rise in the number of COVID cases and the subsequent worsening of confidence have penalized above all spending on services. In the assessments of firms surveyed between November and December, a slowdown in investment is expected in 2022.

Growth in exports remains strong ...

In the third quarter, Italian exports continued to grow, propelled by the recovery in international tourism. The current account surplus remains large, despite the worsening energy balance, and the positive net international investment position widened.

... and employment and labour supply increase

The recovery in labour demand since the summer has translated into an increase in hours worked, a decline in recourse to forms of wage supplementation and an upturn in the number of hires on permanent contracts. The removal of the freeze on dismissals in all sectors has had no significant repercussions. The stagnating unemployment rate stems from the gradual recovery in labour supply, which is nearing pre-pandemic levels. Developments in contract renewals do not point to significant wage increases in 2022.

Inflation is driven by higher energy prices

Inflation has risen to high levels (4.2 per cent in December), driven by energy prices. Net of the volatile components, the annual change in prices remains moderate. The increases in production costs have only passed through to retail prices to a modest degree so far.

The pandemic and the expectations on the monetary policy stance have influenced market performance

Financial market trends have reflected fears concerning the rise in COVID cases around the world, uncertainty regarding the severity of the new Omicron variant and its effects on the economic recovery, and expectations on the monetary policy stance. Market volatility and investors' risk aversion have increased, which for Italy has meant a widening of the sovereign spread compared with German government bonds.

Firms' demand for credit remains moderate

In the autumn, growth in lending to non-financial corporations continued to be weak, reflecting the low demand for new loans, owing in part to the ample liquidity accumulated over the last two years. Lending to households continues to expand at a fast pace. Credit supply conditions remain relaxed. The new non-performing loan rate, while up slightly, is still very low and the share of performing loans for which banks recognized a significant increase in credit risk declined. In the first nine months of last year, banks' profitability improved, especially following the reduction in loan loss provisions.

Expansionary public finance measures are planned for the three-year period 2022-24 too

The available preliminary data for 2021 point to a significant improvement in general government net borrowing compared with 2020. The debt-to-GDP ratio is also estimated to have fallen, to around 150 per cent (compared with levels of about 155 and almost 135 per cent in 2020 and 2019 respectively). For the three years 2022-24, the budgetary package approved by Parliament in December raises the deficit by 1.3 per cent of GDP on average per year compared with the current legislation scenario.

The projections for Italy assume a gradual improvement in the public health situation

This Bulletin reports the macroeconomic projections for the Italian economy for the three years 2022-24, which update those published in December. The scenario presented here is based on the assumption that the latest resurgence in new COVID cases will have negative effects on mobility and consumption patterns in the short term but will not require a severe tightening of restrictions. It also assumes that the spread of the epidemic will lose momentum from the spring onwards.

GDP will likely return to pre-pandemic levels in mid-2022 ...

GDP, which at the end of last summer was 1.3 percentage points below pre-pandemic levels, is projected to return to those levels around the middle of this year. The expansion in economic activity should then continue at a robust pace, though less markedly compared with that observed following the reopenings of mid-2021. GDP is expected to increase by an annual average of 3.8 per cent in 2022, 2.5 per cent in 2023 and 1.7 per cent in 2024. The number of persons employed will likely increase more gradually and will regain pre-crisis levels at the end of 2022.

... and inflation appears set to diminish over the course of this year, returning to moderate levels in the next two years

Consumer prices are projected to rise by 3.5 per cent on average this year, 1.6 per cent in 2023, and 1.7 per cent in 2024. The core component is expected to be equal to 1.0 per cent this year and to increase gradually, reaching 1.6 per cent in 2024, driven by the reduction in spare capacity margins and wage developments.

However, uncertainty is high, with downside risks to growth

The growth projections are subject to multiple risks, mostly on the downside. In the short term, the uncertainty surrounding the forecasting scenario is linked to the public health situation and to tensions on the supply side, which could turn out to be more persistent than expected and be transmitted to the real economy to a greater extent. In the medium term, the projections are still conditioned by the full implementation of the spending programmes in the budget and the complete and timely realization of the interventions under the NRRP.

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