Global growth weakens further
In the third quarter, the global economy continued to be affected by the exceptionally high inflation, worsening financial conditions, the uncertainty linked to the conflict in Ukraine, weak economic activity in China and, less so than at the beginning of the year, supply chain difficulties. The price of natural gas in Europe reached new heights in August and decreased after the storage targets were met; futures contracts indicate that the prices will remain very high throughout next year, partly due to the risks weighing on energy supply security. Oil prices instead fell owing to the widespread deterioration in the economic situation. World trade slowed. The latest forecasts by the international institutions expect global growth to weaken further next year, with risks tilted to the downside.
The normalization of monetary policy accelerates in many advanced economies
In July and September, the Federal Reserve decided on two further sizeable increases in the benchmark rate and confirmed the need to maintain a restrictive monetary policy stance until inflation is brought back in line with the target. The Bank of England also raised its reference rate again in its last two meetings; between the end of September and mid-October, it intervened by purchasing government bonds to counter the financial tensions in the wake of the government's announcement of highly expansionary fiscal measures. Several other central banks in advanced economies have raised their key interest rates; however, monetary policy remains accommodative in Japan and, among the emerging economies, in China. The financial conditions in international markets have become more tense since the beginning of July: government bond yields have risen further and equity prices have continued to fall; volatility continues to be very high. The appreciation of the dollar against the other leading currencies continues, reflecting the more rapid normalization of monetary policy in the United States.
Economic activity stagnates in the euro area and inflation continues to rise
Following the expansion in the first half of the year, euro-area GDP likely stagnated in the third quarter, mostly as a consequence of further sharp rises in the prices of energy commodities and the heightened uncertainty. Inflation reached 9.9 per cent in September, driven above all by the most volatile components. Firms and households expect additional increases in inflation in the short term, while expectations three years ahead have stabilized. The five-year, five years forward expectations derived from financial indicators remain at around 2 per cent. Wage growth has remained moderate so far, although it could pick up in the latter part of the year, partly as a result of the increase in the minimum wage in Germany.
The ECB has begun to raise official interest rates and has introduced a new instrument to counter financial market fragmentation
The ECB Governing Council approved two increases in key interest rates in its July and September meetings of 1.25 percentage points overall. It expects to raise them again at its next meetings at a pace and to a level that shall be determined on the basis of new data and revised growth and inflation prospects. The Council also confirmed that it will continue reinvesting the redemptions coming due under the asset purchase programmes; as regards the pandemic emergency purchase programme (PEPP), reinvestment will take place in a flexible manner. At the July meeting, the Council also introduced the new Transmission Protection Instrument (TPI). The announcement in mid-June on the new instrument and on flexible reinvestment under the PEPP helped to curb the yield spreads between the government bonds of the countries most exposed to tensions on the sovereign debt markets and German bonds, as well as their responsiveness to changes in the expectations of rises in official interest rates.
GDP in Italy is estimated to have decreased slightly in the third quarter
According to the central value of our estimates, GDP declined marginally in Italy in the summer quarter, in part because of the sharp rises in energy prices and the uncertainty over the course of the war in Ukraine. The slight fall in industrial production was accompanied by signs of weakening in construction. In contrast, activity in the service sector likely remained stable, thanks to the still positive contribution of the tourism and leisure sectors. On the demand side, household spending was curbed by the loss of purchasing power due to high inflation. The firms interviewed in August and September for our surveys indicate greater pessimism over investment conditions because of the persistent uncertainty.
The current account balance is hampered by the widening of the energy trade deficit
In the second quarter, Italian exports in volume increased, driven by both the goods and, even more so, the service components. However, total imports grew at a faster pace. Goods exports appear to have slowed slightly in July and August. The steep deterioration of the current account balance, underway since the second half of 2021, continued owing to the further widening in the energy trade deficit. Nevertheless, the positive net international investment position remains solid.
Employment slows and wage growth remains moderate
Employment continued to expand in the second quarter; however, signs of a slowdown emerged over the summer months. Firms' employment expectations have also worsened, though they remain compatible with an expansion in labour demand. The growth in contractual wages remained moderate overall. The most recent bargaining agreement renewals have provided for wage increases over the contractual period in line with inflation, net of the imported energy component. The share of employees awaiting renewals remains high in the sectors most affected by the pandemic. According to our estimates, the implementation of the National Recovery and Resilience Plan - provided it is complete and within the scheduled time frame - will lead to a significant expansion in employment by 2026, especially in construction and in some high-tech sectors.
Inflation increases further, though partly mitigated by government measures
Over the summer, harmonized consumer price inflation rose further, to 9.4 per cent in September, as it continued to be affected by the exceptional rises in energy prices and by their pass-through to the prices of other goods and services. We estimate that the measures adopted by the Government to mitigate the impact of higher energy prices on the financial position of households and firms lowered inflation by about 2 percentage points in the third quarter, in line with the estimates for the second quarter.
The growth outlook worsens and inflation is more persistent
Our latest projections indicate that, in a baseline scenario, GDP would rise by 3.3 per cent this year overall, slow to 0.3 per cent in 2023 and grow by 1.4 per cent in 2024. However, these figures remain subject to considerable downside risks. Consumer price inflation is expected to equal 8.5 per cent on average in 2022, to decline to 6.5 per cent in 2023, and to reach just above 2 per cent in 2024. In an adverse scenario - which assumes the interruption of Russian gas supplies starting from the last quarter of 2022, further increases in energy prices and a sharper slowdown in world trade - GDP is projected to contract by over 1.5 per cent in 2023 and turn moderately upwards in 2024. Inflation is expected to continue to rise next year too, to more than 9 per cent, and then fall sharply in 2024.
The cost of bank loans increases slightly and financial conditions worsen
Bank lending to firms accelerated in August, reflecting higher working capital requirements - due to greater input costs - and lower corporate bond issues. The surveys of banks point to a further tightening of their supply policies, confirmed by the more stringent credit access conditions reported by firms in the latest business surveys. The increase in policy rates in July was only partly passed on to the cost of borrowing for firms and households recorded in August, which remains low overall. Financial market conditions have worsened, amid persistent inflationary pressures and fears of a deteriorating business cycle. Higher policy rates and expectations of further hikes resulted in a sharp increase in government bond yields, especially on short maturities. The spreads of Italian sovereign bond yields vis-à-vis the ten-year German Bund widened compared with July.
The Government's estimates for the public accounts are more favourable than in the spring
At the end of September, the Government updated its estimates for the public accounts in the current year and over the three years 2023-25. Net borrowing is estimated at 5.1 per cent of GDP in 2022, around 0.5 percentage points below what had been programmed in April; the debt-to-GDP ratio will also likely decline more than expected last spring. In the last few months, additional measures have been enacted to counter the impact of rising energy commodity prices on the financial position of households and firms, in line with the deviations from the government budget authorized by Parliament.
