Economic Bulletin No. 3 - 2023

Global economic recovery abates

Global economic activity is being curbed by high inflation and by tight financing conditions. GDP is decelerating in the United States, and the recovery in economic activity in China is losing momentum again after benefiting from the pandemic containment policies being lifted. Despite the brisk growth in services in the main economies, activity is affected by the weakening of the manufacturing cycle, which is contributing to reducing the growth prospects for global trade and for commodity and energy prices. The lower contribution of the energy component is matched by the fall in consumer price inflation in the leading industrial countries, except for Japan. However, core inflation is still struggling to come down.

Monetary tightening continues in the main advanced economies

After a rise in May, the Federal Reserve left its benchmark interest rates unchanged in June, although it indicated that it might raise them over the next few months. The Bank of England stepped up its restrictive stance, increasing its rates by 50 basis points in June. Following the turmoil connected with the banking crisis episodes in the United States and in Switzerland, conditions normalized in the international financial markets.

The weak cyclical phase continues and inflation goes down in the euro area

In the first quarter of this year, euro-area GDP declined slightly for the second consecutive quarter and, according to our estimates, stagnated in the spring. The further decrease in manufacturing activity was partially offset by the expansion in services. Employment continued to increase and wage growth gathered pace. Consumer price inflation declined again but core inflation remains high. The Eurosystem staff projections indicate that consumer price inflation is expected to reach 5.4 per cent in 2023, and to then gradually go down to 2.2 per cent in 2025.

The ECB raises its key interest rates again

Between May and June, the Governing Council of the European Central Bank raised its key interest rates by 50 basis points overall. Decisions on interest rates will continue to be made on a meeting-by-meeting basis, taking account of data as they become available, so as to achieve a timely return of inflation to the 2 per cent medium‑term target. The Council also confirmed the end of the reinvestments under the asset purchase programme, starting from July, as well as the full reinvestment, in a flexible manner, of the maturing securities purchased under the pandemic emergency purchase programme, at least until the end of 2024. The yields on ten-year government bonds rose slightly in the euro area, while the spreads with the corresponding German bond moved heterogeneously across countries, narrowing in Italy.

GDP growth in Italy appears to pause in the spring

After rebounding in the first quarter, according to our estimates, GDP remained broadly unchanged in the spring, above all because of the contraction in manufacturing activity, which was affected by the weakening of the industrial cycle at global level. The expansion in household consumption continued at a slower pace. Investment was held back by the tightening of financing conditions and by a less favourable outlook for demand.

The current account balance improves, benefiting from the reduction in energy product costs

Exports have declined in volume since the start of the year, reflecting the weakness of world trade. However, the current account balance has improved, partly thanks to the performance of energy imports, which are benefiting from falling world prices. The energy deficit is expected to decrease in 2023 as a whole. Foreign investors have shown keen interest in Italian portfolio securities. The Bank of Italy's negative TARGET2 balance has narrowed. The net international investment position remains positive.

Employment continues to rise, wage growth steps up, and profit margins go up slightly

The expansion in the number of persons employed has continued, exceeding pre‑pandemic levels. The participation rate continues to rise and the unemployment rate has decreased, to below 8 per cent. Wage growth gathered pace as a result of the payment of considerable arrears in the public sector due to delayed contract renewals; it is expected to strengthen further over the remainder of the year, though remaining lower than the rise in prices. In some sectors of industry, wage growth will also be boosted by the adjustment to inflation included in the wage indexation clauses. Profit margins are rising slightly, albeit with marked differences across sectors: they have returned to pre‑pandemic levels in manufacturing, while they are still lower in construction and in services.

Consumer price inflation continues to fall

Consumer price inflation fell further in the spring, thanks to the sharp decline in the energy component, although it remains high. The first falls in inflation were recorded in relation to food and non-energy industrial goods, which are beginning to reflect the marked reduction in the prices of energy inputs. Inflation in services also showed some signs of reduction in June. Households and firms expect inflationary pressures to ease further.

Bank loans decrease and the cost of credit rises

Loans to the non-financial private sector decreased further between February and May, driven by the rise in the cost of credit, the reduced financing needs for investment and the continued tightening of credit standards. The latter are affected by the higher risk perception and the lower risk tolerance on the part of intermediaries. The non-performing loan rate has remained low while the ratio of the flow of loans in arrears has increased.

GDP is expected to slow in 2023‑25; inflation is still high this year but is expected to fall sharply over the next two years

In the update to the three‑year baseline scenario, GDP is set to grow by 1.3 per cent this year, 0.9 per cent in 2024 and 1.0 per cent in 2025. Over the next few quarters, recovery will likely be affected by the tightening of financing conditions and by weak international trade. Investment is expected to slow, only partially supported by the implementation of the projects included in the National Recovery and Resilience Plan. Inflation is expected to reach 6.0 per cent on average this year and go down to 2.3 per cent in 2024 and to 2.0 per cent in 2025, reflecting the direct and indirect effects of the fall in energy commodity prices. Core inflation, which is expected to stand at 4.5 per cent on average this year, will reach 2.0 per cent at the end of the three-year forecasting period.

The projections are surrounded by high uncertainty, with downside risks to growth

High uncertainty continues to be a key feature of the macroeconomic outlook. The risks to growth are tilted to the downside and are especially linked to the course of the conflict in Ukraine and to the possibility of a greater than expected tightening in financing conditions. In contrast, the risks to inflation are balanced and include, on the upside, an incomplete pass-through of the recent decrease in energy prices and, on the downside, a more marked and longer-lasting deterioration in aggregate demand. The risk of a wage-price spiral remains low.

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