The global economy slows further
Signs of a slowdown in economic activity have emerged in the United States and GDP growth in China remains below that of the pre-pandemic period. The latest OECD estimates indicate that global GDP growth will slow down to 2.7 per cent in 2024 as a result of restrictive monetary policy measures and worsening consumer and business confidence. Risks are still heavily tilted to the downside owing to international political tensions, particularly in the Middle East. Our models point to subdued dynamics in the trade of goods and services for the current year, partly as a consequence of weak world demand. Oil and natural gas prices have remained low despite the attacks on maritime trade in the Red Sea.
The Federal Reserve and the Bank of England keep their policy rates unchanged
In the autumn, core inflation declined in the United States and the United Kingdom. Both the Federal Reserve and the Bank of England kept their policy rates unchanged, announcing that their monetary policy stance will remain restrictive until inflation returns in line with their respective targets. The downward revision in market operators' expectations for policy rates in the United States and Europe led to an easing of the conditions in the global financial markets.
Economic activity in the euro area remains weak and the disinflation process picks up pace
Stagnation in the euro area appears to have continued in the final months of 2023, reflecting sluggish growth in domestic and foreign demand. The persistent weakness in the manufacturing and construction cycles spread to the service sector as well. However, employment continued to rise. Inflation has been below expectations in recent months and disinflation has extended to all the main components of the consumption basket, including those items whose prices had started rising at a later stage. The Eurosystem staff projections published in December indicate that consumer price inflation will decrease further, from 5.4 per cent in 2023 to 2.7 per cent in 2024, 2.1 per cent in 2025 and 1.9 per cent in 2026.
The ECB keeps the key interest rates unchanged
In its October and December meetings, the ECB Governing Council decided to keep the key interest rates unchanged, based on the assessment that their current levels, if maintained for a sufficiently long period, will make a substantial contribution to the return of inflation to its target of 2 per cent. Moreover, over the second half of 2024, the Council intends to gradually phase out the reinvestment of maturing securities purchased under the pandemic emergency purchase programme (PEPP) and to discontinue them completely by the end of the year. In the euro area, past increases in key interest rates continue to be transmitted to the cost of lending to firms and households, with both having decreased their demand for credit considerably. The monetary tightening has contributed to a sharp deceleration in the growth of monetary aggregates, driven above all by changes in current account deposits. The yields on ten-year government securities have decreased and the spreads between Italian and German government bonds have narrowed.
GDP remains stable in Italy in Q4 2023
According to our estimates, growth in Italy remained close to zero in the final months of 2023, dampened by tighter credit conditions and by the persistence of high energy prices. Consumption stagnated and investment contracted. Economic activity turned downwards again in manufacturing, while holding stable in services. It grew in construction, which continued to benefit from tax incentives. According to our latest projections, prepared as part of the Eurosystem's coordinated exercise, GDP will grow by 0.6 per cent in 2024 (compared with an estimated 0.7 per cent in 2023) and by 1.1 per cent in each of the following two years.
The current account surplus firms up
Exports grew in the autumn. The current account balance was positive in the third quarter, thanks to the further reduction in the energy deficit and the increase in the non-energy goods surplus. Non-resident investors made net purchases of Italian securities and the negative TARGET balance continued to improve. The positive net international investment position strengthened further.
Employment continues to rise and wage growth remains robust
The labour market showed signs of resilience in October and November: employment continued to grow, though at a slower pace than in the first part of the year. The participation rate reached a new high since the time series began, while the unemployment rate remained stable. Wage growth stepped up further in the non-farm private sector in the third quarter. Profit margins, which have remained above pre-pandemic levels despite their recent slight reduction, and the decrease in input costs might allow firms to absorb wage pressures without leading to renewed price increases.
The fall in inflation intensifies
The fall in core inflation intensified, spreading to non-energy industrial goods and to services. In December, headline inflation stood at 0.5 per cent (and core inflation at 3.0 per cent). Households and firms expect inflationary pressures to ease in the short and medium term. According to our latest projections, prepared as part of the Eurosystem's coordinated exercise, the increase in consumer prices will slow to 1.9 per cent in 2024 (from 5.9 in 2023), and then diminish gradually to 1.7 per cent in 2026; core inflation is projected to reach 2.2 per cent this year (4.5 per cent in 2023) and to fall below 2 per cent over the next two years.
The monetary restriction continues to be transmitted to the credit market
Developments in lending continue to reflect very weak demand for loans and tight credit standards, in line with the restrictive monetary policy stance. Past raises in the key interest rates continue to affect the cost of credit to firms more strongly than suggested by historical regularities. The monetary restriction is also leading to a reduction in bank funding. In the banking sector, profitability has improved, the non-performing loan rate remains low and the capitalization level has increased.
The public accounts likely continue to improve in 2023
Preliminary data point to a reduction in the deficit and in the debt-to-GDP ratio in 2023. The budget for 2024-26 was approved in December; according to official assessments, it raises net borrowing for 2024 by 0.7 percentage points of GDP compared with the current legislation scenario and is consistent with an only marginal decrease in the debt-to-GDP ratio over the three years considered. In December, the European Union approved the modified National Recovery and Resilience Plan (NRRP) and disbursed the fourth tranche of the funding.
An agreement is reached on the reform of EU economic governance rules
In the second half of December, the Council of the European Union reached an agreement on the reform of the Stability and Growth Pact. The agreement incorporates the main changes introduced by the Commission's proposal last spring, i.e. the centrality of medium-term debt sustainability analyses of the public debt of individual Member States and the key role of bilateral negotiations with each of them concerning fiscal adjustments. Nevertheless, it introduces some additional numerical requirements, equal for all Member States, on public debt and structural deficit dynamics. Negotiations are under way among the EU institutions with a view to finalizing the legislation.
