The energy price shock and the worsening external outlook are set to take their toll and push the Italian economy into a contraction this winter. Thanks to solid growth in the first three quarters of the year, real GDP growth is forecast at 3.8% in 2022, before slowing down to 0.3% in 2023 and picking up to 1.1% in 2024. The inflation rate is set to climb to 8.7% this year and to moderate to 2.3% by 2024. The declining government deficit path, which has been supported also by economic growth, is projected to come to a halt in 2024, slowing down public debt reduction.
Last update (forecast)
Last update (11/11/2022)
|GDP growth (%, yoy)||6,7||3,8||0,3||1,1|
|Inflation (%, yoy)||1,9||8,7||6,6||2,3|
|General government balance (% of GDP)||-7,2||-5,1||-3,6||-4,2|
|Gross public debt (% of GDP)||150,3||144,6||143,6||142,6|
|Current account balance (% of GDP)||3,1||0,8||-0,2||0,5|
Energy price shock interrupts expansion
Italy’s economy exceeded pre-COVID-19 levels in the second quarter of 2022. The reopening of the economy, after lifting all pandemic-related restrictions, and policy measures to mitigate the impact of high energy prices on firms and households contributed to solid output growth. However, with manufacturing and construction activity already weakening since the summer and reopening dynamics having almost run their course, the negative impact of high energy prices is set to take the upper hand towards the end of the year. The Italian economy is forecast to enter a period of contraction, with a tangible recovery not to be expected before the second half of 2023.
The solid growth performance in the first three quarters of 2022 coupled with a sizeable carryover effect is projected to propel real GDP growth to 3.8%. In 2023, output growth is set to slow down to 0.3%, before picking up to 1.1% in 2024. The projections are based on a no-policy-change assumption, as national elections in late September and the subsequent formation of a new government delayed the adoption of a draft budget for 2023.
Multi-pronged headwinds weigh on demand
With high inflation and feeble employment growth weighing on real disposable incomes, consumer spending is likely to stagnate next year. With the assumed easing of price pressures and moderately accelerating wage growth, private consumption is set to pick up again in 2024. High input costs, tightening financing conditions and slowing demand are projected to dampen corporate investment, while government capital spending is expected to remain robust on the back of RRF-financed investment. In addition, housing investment is set to slow down sizeably, due to higher mortgage rates and the phasing out of building renovation incentives. After registering strong growth this year partly on the back of a buoyant tourism season, exports are forecast to grow more moderately in 2023, in line with external demand. The current-account balance is set to deteriorate sharply, reflecting the energy-related negative terms-of-trade effect.
Signs of a slowdown in employment
Labour demand is decreasing in more energy-intensive sectors such as manufacturing and construction, but employment growth also slowed down in the retail and tourism sector. Overall, jobs growth is expected to remain broadly in line with economic activity over the forecast horizon. The unemployment rate is set to rise, from 8.3% in 2022 to 8.5% in 2024.
Price pressures to remain persistent
Amid broadening price pressures largely originating from sharply rising energy prices, HICP inflation is set to average 8.7% in 2022. Energy prices are assumed to reach their peak end-2022 and start slowly falling thereafter, while wage growth is expected to pick up only gradually and with a lag, as several wage agreements had already been concluded before the energy prices shock. Consumer price inflation is projected to moderate to 6.6% in 2023, before falling further to 2.3% in 2024.
The deficit reduction is set to halt in 2024
The government deficit is projected to decline from 7.2% of GDP in 2021 to 5.1% in 2022. The 2022 budget already contained deficit-increasing measures, including a further reduction of the tax wedge on labour. In addition, the government adopted several fiscal packages since the beginning of the year, mostly to mitigate the economic and social impact of high energy prices. The total budgetary cost of temporary support measures in response to high energy prices is estimated at 2.6% of GDP in 2022, net of revenues from the new tax on windfall profits by energy companies. Favourable revenues and reductions in some budget appropriations also contribute to offsetting the costs of the energy related support measures.
Overall, primary expenditure is set to decrease, following the unwinding of pandemic-related fiscal measures and a substantial reduction in public investment, mainly due to delays in projects supported by the RRF. Conversely, interest expenditure is expected to increase to 4.0% of GDP from 3.6% in 2021, due to higher bond yields. This projection also assumes that the renewal of most public wage contracts for the period 2019-2021 increases the wage bill in 2022.
In the absence of a 2023 budget, the general government deficit is forecast to decrease further to 3.6% of GDP in 2023. Primary expenditure is expected to decline, along with the phasing out of energy support measures. This reduction is partly offset by higher pension expenditure due to the indexation to past inflation and a pick-up in investment. Bond yields are likely to continue putting pressure on debt servicing costs, with interest expenditure remaining stable at 4.0% of GDP.
In 2024, the headline deficit is expected to increase to 4.2% of GDP as current taxes are projected to grow more slowly than nominal GDP and pensions are set to further increase. Interest expenditure is set to further rise to 4.1% of GDP.
Italy’s debt-to-GDP ratio is forecast to decrease from 150.3% in 2021 to 144.6% in 2022, thanks to economic growth and a favourable stock-flow adjustment. It is thereafter set to decline slightly, to 142.6% in 2024.