The outlook for the world economy improves, but risks remain
The global economy continued to improve in the spring, still driven by services, but with manufacturing also showing signs of strengthening. Consumption keeps growing in the United States; industrial activity is expanding in China, while domestic demand remains weak, causing wider trade imbalances with advanced countries. According to the latest OECD estimates, global GDP will increase by 3.1 per cent in 2024; based on our assessments, world trade will grow by 2.2 per cent. A potential escalation of the ongoing conflicts still poses the main downside risk to global growth.
Monetary policies remain tight
In the spring, inflation resumed its decline in the US, after picking up in the first quarter, and continued to fall in the UK. In June, the Federal Reserve left its policy rates unchanged for the seventh consecutive meeting, and reiterated the need for the disinflation process to take hold before starting to ease monetary conditions. The Bank of England and the Bank of Japan kept their policy rates unchanged as well. Financial market conditions remained broadly stable, though in the euro area they were affected by the political uncertainty in France. After the European elections, the yield spreads of ten-year government bonds vis-à-vis German Bunds widened in France, while they returned below April levels in Italy, after rising temporarily.
In the euro area, economic activity grows moderately, while disinflation eases
According to our estimates, euro-area GDP posted modest growth in the spring, driven by the service sector. Disinflation eased, mainly due to still strong price increases in services. However, the underlying inflation indicators, which exclude more erratic fluctuations, continued to fall. According to the Eurosystem staff projections released in June, inflation will decline to 2.5 per cent this year, to 2.2 per cent in 2025 and to 1.9 per cent in 2026.
The ECB cuts its key interest rates
In June, the Governing Council of the European Central Bank lowered its key interest rates by 25 basis points. It also confirmed its determination to ensure a timely return of inflation to its medium-term target by keeping interest rates at a sufficiently tight level for as long as necessary. The Governing Council will continue to follow a data-dependent approach when setting the level and duration of restriction, without pre-committing to a particular rate path.
Growth remains moderate in Italy
Following moderate growth in the first quarter of 2024, Italian GDP continued to expand somewhat in the spring, according to our estimates. It was still buoyed by services, particularly tourism-related services, which are benefiting from the strong performance of foreign travellers' spending. By contrast, activity declined in construction and in manufacturing. On the demand side, further growth in exports and positive signs in consumption were associated with a less favourable picture for investment. Our most recent macroeconomic projections, prepared as part of the Eurosystem staff projections, show GDP increasing by 0.6 per cent in 2024 (by 0.8 per cent without calendar adjustments), by 0.9 per cent in 2025 and by 1.1 per cent in 2026.
The current account surplus firms up
The current account surplus widened in the first quarter of 2024, a positive reflection of the improvement in the goods balance. Non-resident investors made sizeable net purchases of Italian securities, especially those issued by the public sector; the negative TARGET balance declined in the first six months of the year. The positive net international investment position strengthened.
Employment continues to rise and wage growth remains robust
Employment continued to rise in the spring months: with labour market participation stable above pre-pandemic levels, the unemployment rate fell further, approaching the euro-area average. Growth in labour costs in the non-farm private sector has strengthened over the last few months, buoyed by the renewals of the collective bargaining agreements in the service sector and by the payments due under the current agreements.
Inflation remains low
Headline inflation has remained low and core inflation has edged down over the last few months. Disinflation has continued to be slower in services, owing both to the components whose prices tend to lag behind the general index and to tourism-related items, for which demand remains high. According to firms, consumer price inflation is likely to stay below 2 per cent in the short and medium term. Based on our projections, it will remain low, at 1.1 per cent this year and at just over 1.5 per cent on average over the two years 2025-26.
The cost of lending curbs the demand for loans
Monetary restriction is still affecting the cost of credit. Lending to firms continues to fall, albeit less so; this is due not only to modest demand for financing, owing to high interest rates and weak investment, but also to tight credit supply standards because of a widespread perception of risk.
The European Commission to recommend opening an excessive deficit procedure for Italy
The European Commission has announced that it will recommend opening excessive deficit procedures for five euro-area countries, including Italy. The Commission forecasts that Italy's deficit-to-GDP ratio, despite falling sharply compared with last year's figure of 7.4 per cent, will remain above the 3 per cent threshold both this year and the next.
With regard to the National Recovery and Resilience Plan, at the end of June, the Italian Government requested payment of the sixth instalment, following the achievement of the 37 targets and milestones it had to meet. In early July, the Commission also gave its preliminary approval to the request for payment of the fifth instalment.
