Global growth continues, with differences across regions
Economic activity remains robust in the US but is losing momentum in the other advanced economies. The real estate market crisis in China is still weighing on domestic demand. According to our estimates, world trade will expand by just over 3 per cent in 2025, in line with the expected performance of global GDP. However, heightened geopolitical tensions and the announced tightening of US trade policy could have a negative impact on the outlook for international trade. Oil prices rose just barely; natural gas prices remain volatile and subject to upward pressures due to both supply and demand factors.
Monetary policy in the US continues to ease, though more gradually
Inflation picked up slightly in the United States, in line with expectations; it inched down in the United Kingdom, while it rose more than anticipated in Japan. In its December meeting, the Federal Reserve cut its benchmark rates again by 25 basis points, to 4.25-4.50 per cent. The members of the Federal Open Market Committee indicated a more gradual normalization of monetary policy than in previous meetings, given the slower decline in inflation and the low unemployment rate. This contributed to the strong appreciation of the US dollar against the other major currencies, including the euro. The Bank of England and the Bank of Japan kept their rates unchanged in December. The Chinese authorities announced a package of measures to support domestic consumption, complementing the People's Bank of China's commitment to maintain an expansionary monetary policy stance.
Euro-area GDP slows, inflation hovers around 2 per cent
Based on the available information, economic growth in the euro area weakened in the fourth quarter of 2024, penalized by lacklustre consumption and investment and by declining exports. The trend in manufacturing remains disappointing, especially in Germany; the boost from services appears to have waned too. Inflation is still moderate, at around 2 per cent, with the core component being broadly stable, but it is still relatively high in services, partly reflecting delayed adjustments to past inflation. The Eurosystem staff projections for euro-area growth were revised downwards in December, to over 1 per cent per year on average for the three years 2025-27; inflation is set to stabilize around the European Central Bank's 2 per cent target.
The ECB cuts its key interest rates further
The Governing Council of the ECB cut its reference rates by a further 25 basis points in December. Markets expect an additional reduction of around 75 basis points over the course of 2025. Despite the gradual easing of monetary policy, credit growth in the euro area remains subdued, in an environment of high uncertainty and weak demand.
Growth is struggling to regain momentum in Italy
Economic activity in Italy remained weak in the fourth quarter of 2024, partly affected, as in the rest of the euro area, by the persistent sluggishness in manufacturing and the slowdown in services. In construction, the support provided by the works under the National Recovery and Resilience Plan was in contrast with the contraction in activity in the housing sector. Domestic demand was likely held back by the slowdown in household spending and by still unfavourable investment conditions. According to our projections, drawn up as part of the Eurosystem coordinated exercise, growth will gain momentum throughout the year, averaging around 1 per cent in the three years 2025-27.
The current account surplus decreases
Exports of Italian goods were likely held back by a sharp contraction in global demand in the autumn. The protectionist policies announced by the new US administration could have an impact on the foreign sales of Italian firms exporting to the US market, especially small and medium-sized enterprises. The current account balance narrowed in the third quarter, though it remained positive. Italy's positive net international investment position strengthened further. Foreign investors' purchases of Italian government securities remain high, and the yield spread between ten-year Italian and German government bonds has narrowed.
Employment continues to grow, though with signs of the labour market weakening
Although headcount employment continues to increase, the number of hours per worker is falling and recourse to wage supplementation remains high, especially in manufacturing. The gradual decline in the labour force participation rate continued in the autumn months, especially among the younger population groups, contributing to reduce the unemployment rate to an exceptionally low level. Growth in contractual wages in the private sector remains robust, helping the gradual recovery in households' purchasing power.
Inflation remains under 2 per cent
In late 2024, the drop in energy prices continued to play a role in keeping consumer price inflation well below 2 per cent. Core inflation remains moderate, but relatively higher in the services component. Firms expect modest increases in their prices in 2025. According to our forecasts, consumer price inflation will rise to 1.5 per cent in 2025-26 (from 1.1 per cent in 2024) and will reach 2.0 per cent in 2027, driven by the temporary effects of the entry into force of the new EU emission trading system covering greenhouse gases and pollutants.
Monetary easing is passing through to the cost of lending
The cuts in the key ECB interest rates are being passed through to the cost of bank funding and the cost of credit, in line with historical regularities. At a time of weak investment, firms' demand for loans remains modest. Household mortgage loans continue to recover gradually.
Parliament approves the Budget Law for 2025-27
The European Commission has given a positive assessment of the fiscal adjustment programme outlined in Italy's medium-term structural fiscal plan for the years 2025-31. According to the Government's assessments, the Budget Law approved in December 2024 will raise the ratio of net borrowing to GDP by 0.4 percentage points in 2025, 0.6 points in 2026 and 1.1 points in 2027. About half of the financial resources allocated to expansionary measures will be used to turn the measures for adjusting the personal income tax (IRPEF) and lowering the tax wedge into structural ones.
