Real GDP is expected to have bottomed out in the third quarter and to pick up in the last quarter of 2023, leading to annual growth of 0.7%. It is set to accelerate to 0.9% in 2024 and 1.2% in 2025, driven by RRF-funded investment. Inflation is forecast to fall to 6.1% this year, 2.7% in 2024 and 2.3% in 2025. The reduction of the government deficit- and debt-to-GDP ratios is projected to come to a halt in 2024-25.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | 0,7 | 0,9 | 1,2 |
| Inflation (%, yoy) | 6,1 | 2,7 | 2,3 |
| Unemployment (%) | 7,6 | 7,4 | 7,3 |
| General government balance (% of GDP) | -5,3 | -4,4 | -4,3 |
| Gross public debt (% of GDP) | 139,8 | 140,6 | 140,9 |
| Current account balance (% of GDP) | 0,8 | 0,9 | 1,0 |
Government-supported investment boosts output growth
Italy’s economic recovery came to a halt in the second quarter of 2023. The expansion in capital accumulation, pushed by tax credits for housing renovation in 2021-22, ended abruptly in 2023-Q2 as the credits became significantly less generous. Real GDP contracted by 0.4% q-o-q in the second quarter and is estimated to have stagnated in the third. It is, however, expected to resume growing as from the fourth quarter, leading to a projected annual growth of 0.7% in 2023, mainly thanks to the positive carryover from 2022 and 2023-Q1.
In 2024, private consumption is set to pick up, along with the projected recovery in real disposable incomes due to nominal wages rising faster than consumer prices. With the gradual phasing out of the tax credits weighing heavily on housing investment, gross fixed capital formation is poised to be propped up by the planned rollout of RRF-supported investment in both infrastructure and equipment, notably in digital and green projects. Thanks to mildly expanding global trade, net exports are set to contribute positively to annual GDP growth, which is forecast to reach 0.9%.
In 2025, real GDP is projected to accelerate slightly, on the back of a continued increase in capital spending only partly affected by a further fall in housing investment. Despite the ensuing increase in imports of capital goods, the further expected improvement in trade conditions is set to support exports. Government consumption is projected to add to private domestic demand, as public wage contracts for 2022-24 are set to be renewed, incorporating part of the past three years’ inflation. Overall, real GDP is forecast to rise by 1.2% in 2025.
Labour market continues to improve
Headcount employment is set to rise markedly again in 2023 but more slowly in the next two years, while average hours worked are projected to fall marginally from the 2022 post-pandemic peak. The unemployment rate is expected to continue falling over the forecast horizon, also thanks to the projected decline in working-age population and despite still rising participation rates.
Disinflation supported by lower energy prices
Robust increases in negotiated wages, driven by the staggered partial recovery of past purchasing power losses, are anticipated over 2024-25. After the rise in 2023, unit labour costs are expected to ease gradually, building on small productivity gains. Steadily falling energy prices are set to push headline inflation down from 6.1% this year to 2.7% in 2024 and 2.3% in 2025, while the inflation rate net of energy and food is forecast to decrease more slowly.
The still high deficit also drives the rise in the government debt ratio in 2024-25
In 2023, the general government deficit is expected to decline to 5.3% of GDP (from 8.0% in 2022), supported by a drop in interest expenditure, linked to the impact of lower inflation on indexed bonds, and by a projected 0.5% annual growth of primary expenditure, lagging behind nominal GDP growth. The reduced budgetary cost of measures to mitigate the impact of high energy prices (1.0% of GDP compared to 2.4% in 2022) and the housing tax credits (1.8% of GDP compared to 2.8% in 2022) is partially offset by higher pension outlays, from the indexation to the inflation recorded in 2022, and by an increase in investment, also related to the implementation of the Recovery and Resilience Plan. Economic growth is expected to drive the growth in current taxes, which are however affected by further cuts to the labour tax wedge for low- and medium-income earners and lower VAT revenues on imported energy.
In 2024, the deficit is forecast to decrease to 4.4% of GDP, following the phase out of energy-related measures and the nil impact of housing tax credits, also due to changes in legislation which led to their statistical reclassification from “payable” until 2023 to “non-payable” tax credits as of 2024. At the same time, this forecast factors in new measures with an overall deficit-increasing impact of around 0.7% of GDP. Further cuts to the labour tax wedge are expected to lead current revenues to rise below nominal GDP growth. Primary expenditure includes the indexation of pensions to the 2023 high inflation, the prolongation and modification of specific early retirement schemes, partly offset by some savings from the spending review (0.1% of GDP), while the continuous mobilisation of RRF funds is set to sustain investment. The cost of servicing the debt is projected to rise to 4.2% of GDP due to higher interest rates for new bond issuances.
The headline deficit is expected to decrease marginally to 4.3% of GDP in 2025. This forecast includes the prolongation to 2025 of the cuts in the labour tax wedge, a further increase in public wages concerning the 2022-24 contractual period and a further rise in interest payments.
The debt ratio is projected to decrease slightly to 139.8% of GDP in 2023, but to increase again to 140.9% by 2025 as the economic growth-interest rate differential becomes less favourable and the primary balance turns marginally positive only in 2025. Also, the stock-flow adjustment is set to be debt-increasing, driven by the delayed impact of “payable” housing tax credits on debt.