Economic Bulletin No. 3 - 2022

The risks to world growth and the inflationary pressures increase

The cyclical indicators for the second quarter point to downside risks for economic activity in most of the advanced and emerging economies. The prices of energy commodities have recorded considerable increases, especially in connection with the ongoing war in Ukraine. This has led to new peaks in inflation, also pushed up by the prices of food products. The latest forecasts of the international institutions for this year indicate a marked slowdown in the global economic cycle, which is being affected by the repercussions of the conflict, the erosion of households’ purchasing power and the negative impact of the heightened uncertainty on private investment.

The normalization of monetary policy in the United States accelerates and financial conditions tighten

The Federal Reserve has stepped up the normalization of monetary policy by raising the target range for the federal funds rate significantly and repeatedly, and announced a plan to reduce its balance sheet; the Bank of England has also raised its reference rate and is continuing to shrink the assets in its portfolio. Conversely, accomodative policies are prevailing in Japan and China. The financial conditions on the international markets have worsened. Share prices have fallen significantly, especially in the United States, and yields on long-term public sector securities have risen. The dollar has continued to appreciate against the euro, reaching parity in the first half of July, reflecting the swifter recalibration of monetary policy in the United States compared with the euro area.

Growth slackens in the euro area and inflation rises further

The euro-area economy is being heavily affected by the tensions connected with the Russian invasion of Ukraine. Growth is likely to have continued in the second quarter, at a moderate pace. Domestic demand is being held back by the further rises in energy commodity prices and new supply chain difficulties for firms. According to preliminary data, inflation reached 8.6 per cent in June. Wage growth has been modest so far in the major countries.

The ECB announces increases in the key interest rates and measures to counter market fragmentation

As of the end of June, the European Central Bank's Governing Council ended its net purchases under the asset purchase programme (APP) and announced its intention to proceed with an initial increase in the key interest rates in the next meeting in July, to be followed by a second increase in September. Moreover, given the sharp rises in the spreads of some sovereign securities and the related risks to the smooth functioning of the monetary policy transmission mechanism, it decided to reinvest maturing securities under the pandemic emergency purchase programme (PEPP) flexibly across time, asset classes and jurisdictions; it also announced an acceleration in the work on a new instrument for countering market fragmentation.

Italy's GDP likely accelerates in the second quarter

According to our estimates, GDP growth in Italy strengthened in the spring, driven by all the main sectors, after being barely positive in the first three months of the year. Services appeared to contribute the most, thanks to the recovery in tourism and transport, the segments hit hardest by the resurgence of the pandemic at the beginning of the year. Construction continued to benefit from the favourable fiscal measures. Manufacturing production is expected to have returned to growth in the second quarter on average; the high-frequency indicators, however, point to a cyclical downturn in industrial activity in June. According to the Bank of Italy’s surveys, about three in four manufacturing firms reported difficulties in sourcing commodities and intermediate inputs and almost two in three indicated that their business was being hindered by the rising energy prices.

Consumption recovers, investment slows

In the spring, consumption benefited from the easing of the restrictions introduced to counter the pandemic. The latest indicators instead signal a slowdown in investment, following the marked rise in the first quarter. The firms interviewed in May and June for the Bank of Italy’s surveys expect capital accumulation to expand in the current year as a whole, but confirm their negative assessments of investment conditions, also in connection with the heightened uncertainty.

The current account balance is affected by the energy balance

Italian exports rose significantly in volume in the first quarter, driven by the goods component; imports grew at an even faster pace, activated by the sizeable investment expenditure of Italian firms. Foreign sales likely continued to grow in the second quarter, though at a slower pace than in the first quarter. The current account balance became negative, mostly owing to the worsening of the energy balance. While it has narrowed compared with end-2021, Italy’s net international investment position remains solid.

Total hours worked rise and so does the number of people employed, though more slowly

The total number of hours worked accelerated in early 2022 compared with late 2021, owing above all to the recovery in hours worked per capita, which have regained pre-pandemic levels. The number of people employed rose slightly, leading to a reduction in the unemployment rate; there are, however, signs of a slowdown in job growth in the second quarter. Contractual wages grew moderately in Italy – as they did in the euro area – reflecting the fact that collective bargaining agreements remain in effect for several years and automatic wage indexation mechanisms play a limited role.

The rise in inflation spreads to food and service prices

Inflation reached new heights in the second quarter (8.5 per cent in June according to preliminary data), driven by the exceptional rises in energy prices, which have gradually passed through to food products and services. The latter were likely also impacted by the recovery in demand connected with the easing of the restrictions introduced to counter the pandemic. The erosion of purchasing power, which is hitting the least well-off households hardest, was mitigated by the measures taken by the Government to assuage the impact of rising energy prices. Overall, these measure will nearly halve the impact of the inflationary shock on the lowest-income households.

Credit access conditions become less favourable ...

The growth in bank loans to non-financial corporations has remained moderate. The surveys of banks point to some degree of tightening in their credit supply policies, confirmed by the deterioration in access conditions perceived by firms. Up until May, the cost of loans to firms held broadly stable while that of loans to households rose.

... and those on the Italian financial market worsen considerably

During the spring months, financial market conditions in Italy were affected by the acceleration in monetary policy normalization at global level and the deterioration in the economic growth outlook. Ten-year government bond yields and the spread with respect to the corresponding German Bund widened, at a time of high market volatility. However, the abrupt increase in the spread does not seem justified by the underlying macroeconomic conditions. Market funding costs for firms and banks rose and share prices fell.

The Government adopts new support measures for households and firms

In line with the budget variance authorized by Parliament last April, the Government issued new measures whose primary goal is to counter the effects of rising energy prices on households’ and firms’ budgets. These measures are funded in part by increasing the extraordinary tax on energy companies’ profits. The Government also announced that it had achieved the milestones and targets set by the National Recovery and Resilience Plan (NRRP) for the first half of the year and submitted the request for payment of the second instalment of the funds.

The projections for Italy are affected by developments in the war in Ukraine

In light of the most recent data, the projections for the Italian economy presented in this Economic Bulletin update those prepared as part of the Eurosystem staff macroeconomic projections published on 10 June. The macroeconomic outlook is heavily influenced by the duration and intensity of the war in Ukraine, whose effects on the Italian economy remain highly uncertain. In the short term, the resurgence of the pandemic constitutes an additional downside risk.

In the baseline scenario, GDP continues to grow moderately in the next two years ...

The baseline scenario assumes that the conflict will continue through all of 2022, without however leading to a total interruption in energy supplies from Russia. GDP is expected to increase by an annual average of 3.2 per cent in 2022, due above all to the carryover effect from 2021, by 1.3 per cent in 2023, and by 1.7 per cent in 2024. Substantial support to economic activity is expected to be provided by fiscal policy and the measures set out in the NRRP. Employment is projected to rise over the entire forecasting horizon, albeit at a slower pace than GDP.

... and inflation declines progressively in 2023 and 2024

Consumer price inflation is projected to equal 7.8 per cent on average this year (1.6 percentage points higher than the figure estimated in June), driven by the rise in energy prices; it is then expected to decrease to 4.0 per cent in 2023 (marking an upward revision of 1.3 per cent compared with previous estimates) and to 2.0 per cent in 2024. The core component, equal to 2.9 per cent this year, is expected to fall to around 2 per cent in the two years 2023‑24.

If energy supplies from Russia were cut off, GDP growth would come to a halt

An adverse scenario assumes a heightening of the conflict in Ukraine such as to cut off energy supplies from Russia, leading to interruptions in production in the more energy-intensive industrial activities, steeper rises in commodity prices, a greater impact on uncertainty and confidence, and weaker growth in foreign demand. The resulting erosion in the carryover effect for this year is expected to bring GDP growth below 1 per cent in 2022 and to lead to a contraction of almost 2 percentage points next year; positive growth will likely only resume in 2024. Inflation is projected to reach 9.3 per cent in 2022 and remain high at 7.4 per cent in 2023 as well, decreasing markedly only in 2024. The scenario does not include possible economic policy responses that could be adopted to mitigate the impact of the assumed developments on households and firms.

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