The global economy slows down
GDP growth remained solid in the United States in the second quarter, while it decreased markedly in China, partly as a result of the housing crisis. Global economic activity slowed in the summer: growth in services abated and the manufacturing cycle contracted further. According to the IMF’s projections published in October, global GDP will decelerate in 2023 and 2024. Geopolitical tensions, heightened by the recent terrorist attacks in Israel, are weighing on global economic developments. Sluggish trade in goods is affecting the world trade outlook. Energy prices turned upwards again.
The monetary policy stance remains tight in the United States and the United Kingdom
Core inflation went down in the United States and in the United Kingdom in the summer months, though it remains high. The Federal Reserve and the Bank of England increased their policy rates by 25 basis points at their meetings in July and August respectively, bringing them to the highest levels since 2007-08 and leaving them unchanged in September. By contrast, the Bank of Japan maintained an accommodative monetary policy stance. Global financial market conditions tightened in the third quarter, partly reflecting a revision of previous expectations of rapid monetary policy easing.
The euro-area economic cycle remains weak and inflation falls
According to our estimates, the stagnation underway in the euro area since late 2022 continued in the summer months, affected by tighter financing conditions and the effects of high inflation on households’ purchasing power. Economic activity remains sluggish in manufacturing and is weakening in services. The labour market showed signs of a slowdown. In September, headline and core inflation declined to 4.3 per cent and 4.5 per cent, respectively. The ECB staff projections indicate that consumer price growth will decrease markedly in 2024 (to 3.2 per cent) and 2025 (to 2.1 per cent). This downturn is confirmed by lower inflation rates for the more persistent items in the basket of goods and services.
The ECB has continued to raise its key interest rates
In July and September, the Governing Council of the ECB increased its key interest rates by a total of 50 basis points. The Council currently considers that the key interest rates have reached levels that, if maintained for a sufficiently long period, will make a substantial contribution to the timely return of inflation to its 2 per cent target. It also reiterated its intention to reinvest the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP) flexibly, at least until the end of 2024. In the euro area, the cost of borrowing for firms and households rose further, reflecting the rise in key interest rates. The yields on ten-year government securities increased, as did the spreads between Italian and German government bonds.
Growth in Italy remains weak in the summer
According to our assessments, economic activity in Italy has continued to be weak both in manufacturing and services, after declining in the second quarter. The indicators confirm the weakness of domestic demand, which reflects tighter credit conditions, inflation-driven household income erosion and the loss of momentum in the labour market. Sluggish global demand and economic activity in the euro area are weighing on exports.
The current account balance continues to improve
The current account balance has turned marginally positive, owing to the decrease in the energy deficit in the spring; non-resident investors expressed a keen interest in Italian government securities. Italy’s positive net international investment position widened. The TARGET2 negative balance continues to improve.
Employment slows, wage growth gathers pace, and profit margins go down
The labour market showed signs of a slowdown in July and August. Employment and the participation rate remained broadly stable. Wage growth in the non-farm private sector strengthened, but upward pressures from collective bargaining agreement renewals appear to be subdued overall. Profit margins declined in all sectors.
Inflation picks up slightly as a result of higher fuel prices
Consumer price inflation rose slightly in September, reflecting higher fuel prices, following the decline recorded in the past few months. Core inflation remained broadly unchanged, well below the February high. Households and firms expect inflationary pressures to ease.
Bank loans decrease and the cost of credit rises
Between May and August, lending to households and firms decreased further. Loan applications are held back by both the higher cost of funding and the lower liquidity needed to finance investment. Bank surveys also show that financial intermediaries’ higher risk perception and lower risk tolerance continue to result in tighter credit standards, thereby dampening lending growth. Banks expect a further tightening of the criteria for granting credit to firms. New non-performing loans continue to be low.
According to the Government, the debt-to-GDP ratio is set to fall only marginally over the next three years
Based on the new public finance targets, which were updated by the Government at the end of September, net borrowing and debt are projected to decline further in 2023, to 5.3 and 140.2 per cent of GDP, respectively. For 2024, the Government is planning to expand the deficit with respect to the current legislation scenario, by about 0.7 percentage points of GDP. Net borrowing is expected to continue to decline gradually over the next few years, to 2.9 per cent of GDP in 2026. The debt-to-GDP ratio is set to fall only marginally over the next three years, with risks mostly tilted to the upside.
GDP growth is projected to slow and inflation to fall significantly in 2023-25
In our baseline scenario, GDP is projected to grow by 0.7 per cent this year, 0.8 per cent in 2024 and 1.0 per cent in 2025. Growth will likely be affected by tighter financing conditions and weak international trade, while it stands to benefit from the effects of NRRP measures and a gradual recovery in household purchasing power. Inflation is projected to fall to 2.4 per cent in 2024 (from 6.1 per cent in 2023) and to 1.9 per cent in 2025. This downtrend reflects a sharp drop in import prices, largely driven by the year-on-year fall in energy commodity prices. Core inflation is projected to drop to 2.3 per cent in 2024 (from 4.6 in 2023) and to 1.9 per cent in 2025, as the effects of past energy price increases fade away and domestic demand weakens.
The risks to growth are tilted to the downside, while the inflation outlook is balanced
The heightened geopolitical tensions, China’s worsening economy and the tighter credit supply conditions in Italy and in the euro area pose downside risks to economic growth. Conversely, the risks to inflation are balanced, with upward pressures coming from further increases in commodity prices and a slower pass-through of the recent decline in production costs, and downside risks mainly associated with a more marked and lasting deterioration in aggregate demand.
