The expansionary phase of the Italian economy may have come to an end, in line with the slowdown of the global one. So says Prometeia's growth forecast report, which sees Italy's GDP in 2023 at +0.7%, the Eurozone's at +0.6% and the global GDP at +2.8%. But a possible recovery is looming from 2024. Let's see what the forecast for growth is.
Forecasts for Italian GDP
After a positive rebound in the first quarter, GDP slowed down sharply in the second quarter (-0.4 % compared to the previous quarter, +0.4 % on the corresponding quarter). Economic indicators point to a stagnant third and fourth quarter of 2023; therefore, according to Prometeia's September Forecast Report, GDP growth is expected to average +0.7% for the year, down from the estimate made three months ago of +1.1%.
In the meantime, however, the consumer price index started to slow down due to the decline of the more volatile components, from energy prices to fresh food, while the slowdown of the core component is still limited. In the coming months, the slowdown is expected to continue, bringing consumer inflation to 5.7% on average for the year, down from 8.2% in 2022.
Why Italy's GDP is slowing down
In addition to trends related to the slowdown in global trade and the effects of restrictive monetary policies, there are three main domestic factors constraining the pace of growth in our country:
Consumption
The weakness in household consumption is set to continue. This is due to the high price level and loss of purchasing power of wages, as well as the fading of the expansionary effects of the 110% Superbonus.
Poor measurements
The Defence Update Note (Nadef) has just been approved by the government, but the details are currently unknown. Given the available information, there is little room for expansionary policies, despite the fact that a slower reduction in the deficit than planned in the April Defence is indicated. Once public contracts and necessary expenditures have been financed, resources for new support measures are limited to a few tenths of GDP. Further interventions will therefore have to be covered in the manoeuvre, with the risk of growth that may be much lower than assumed in the Nadef.
PNRR
The NRP has been redefined but does not yet have the green light from the EU. After the third monitoring report, which had highlighted difficulties in the implementation of numerous interventions, the government drew up a new plan, where, in the face of deficits of EUR 15.9 billion, new interventions for the green transition were included. We anticipate that these changes will lead to a different time profile, depressing the additional impact, especially in the years 2023-2024.
GDP forecast 2024
Prometeia, however, believes it is possible that the inflationary flare-up, combined with the GDP slowdown, may end without a full-blown recession, but with stagnation this year and a slow recovery next year (GDP 2024 at +0.4%). From 2025, in the absence of significant shocks, the Italian economy could return to its average pre-crisis growth rates with moderate inflation. This is because the implementation of the NRP would make it possible to keep the economy on a positive per-capita GDP growth path despite the fading momentum of fiscal policy, which is grappling with the objective of bringing debt below 3% and debt on an obligatory downward path.
The consequences of inflation
In the Prometeia scenario, prices will not fall: the economy will have to settle at permanently higher price levels. In particular, for consumers, those for energy will remain 70% higher than pre-Covid, 20% higher for food and on average 10% higher for other goods and services.
With respect to households with employed income, the wage growth we foresee does not allow for a recovery of the loss of purchasing power. More generally, the financial wealth accumulated by households will also suffer a reduction in its real value. However, economic growth and the large share of services and (again) of the more labour-intensive construction in output will support employment and the share of wage labour in the income distribution.
Economic policy and GDP
Emerging from the emergency calls into question the economic policy approach of recent years, in which the public budget seemed to be unconstrained in the name of protecting families and businesses. In 2022, the deficit due to the 110% Superbonus and the measures to mitigate high energy prices was more than 6% of GDP; in the current year, it is expected to be about 2.8% and fall to almost zero in 2024.
Monetary policy and world growth
We are likely at the end of this global bullish phase in monetary policy rates - in the Prometeia scenario, policy rates in the US and euro area remain firm in the coming months. But its effects have certainly not worn off, nor has the risk of prices rearing their heads again and prompting central banks to intensify monetary tightening.
China's difficulties, especially those related to real estate, pose severe limits to growth and risks to financial stability. Another weakening factor for global growth is the lack of fiscal policy support in major countries after the strong stimulus of the Covid period. However, in our scenario, the EMU and the US slow down significantly to levels just below their respective potential growth, with GDP 2023 at +0.6% and +2% respectively. Thus avoiding a recession, with the good performance of employment, especially overseas, being reflected in the resilience of households' disposable incomes and thus consumption.
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