The GDP contraction of 0.1% q/q in the fourth quarter of 2022 – due to a marked drop in consumer spending (-1.6% q/q) and the negative contribution from inventories – should not lead us to overlook the very good investment figures.
Italy’s job market is taking longer to recover than in neighbouring countries. However, employment is close to topping the peak reached in June 2019, with a gap of just 7,000 jobs in December 2022. The employment rate (15 to 64-year-olds) has reached a new record of 60.5%, while unemployment remains stable at 7.8%. Youth unemployment (15 to 24-year-olds) is at its lowest since September 2008.
The obstacles which the Italian economy is facing remain significant. Unlike its European neighbours, inflation in Italy is not slowing down. It fell only slightly in December, from 12.6% to 12.3%, and remains the highest in Western Europe. While the Italian labour market continues to recover given the fall in the unemployment rate, this indicator masks underlying dynamics which are less positive for economic growth.
During the summer, the Italian economy continued to show a strong resilience against increasing uncertainty. In Q3 2022, real GDP rose by 0.5% q/q, benefiting from the recovery of services, while both manufacturing and construction suffered. Domestic demand more than offset the negative contribution of net exports. A wind of growth continues to blow on the Italian real estate market. In Q2 2022, residential sales recorded a +8.6% y/y growth, while house prices in the same quarter grew by 5.2% y/y. Although the carry-over for 2022 is 3.9%, the outlook for the Italian economy has become more uncertain. Households suffer from high inflation, with purchasing power declining, while firms have to cope with increasing costs of production.
The latest European Commission surveys indicated an encouraging upturn in Italian households' confidence, which nevertheless remains very low. The confidence index improved by 8 points in November, the strongest monthly increase recorded by the survey since its inception in 1985. Consumers’ anticipations on inflation were less negative (the second biggest monthly drop since 1985) and clearly supported this renewed optimism.
Italy is facing an unprecedented and widespread surge in inflation and is unlikely to escape falling into recession this winter. Even though real GDP surprised on the upside in Q3 (+0.5% q/q according to initial estimates by the Italian National Institute of Statistics (Istat)), the barometer clearly indicates that the economic outlook is getting gloomier.
In just seven months, the share of floating rates in the total of new loans for house purchase to Italian households has more than tripled, from 15.8% in February 2022 to 60.9% in September 2022. This latest figure has not been seen since February 2015 and, at that time, the share of floating rates was in a period of sharp decline, falling from 81.1% in February 2014 to 37.7% in August 2015. The recent revival in interest in floating-rate loans for house purchase among Italian households is evidently a result of the average increase of 136 basis points (bps) in fixed-rate loans between January 2022 (1.48%) and September 2022 (2.84%). The increase recorded by floating-rate loans for house purchase since the beginning of 2022 has been more modest (55 bps)
The new Italian government, headed by Giorgia Meloni, has come to power in a challenging environment and divisions have already appeared between the various partners of the right-wing alliance. In addition to political dissension, the Italian economic context is also conducive to tension. Most of the barometer’s indicators have continued to deteriorate in recent weeks, both in terms of business and household indices.
During the first half of 2022, the Italian economy has gradually gained strength. In Q2 2022, the real GDP was 1.1% higher than in Q4 of 2019. The carry-over for 2022 is 3.5%. The recovery that resulted was widespread in a variety of sectors. Construction continued to grow, recording a robust increase in comparison with the pre-COVID level, while both manufacturing and services increased as well, benefiting from the recovery of tourism. The overall outlook for the Italian economy has become more uncertain. Households and firms are extremely cautious. In the three months ending in July, industrial production fell by more than 1.5% q/q. The value of retail trade continued to rise, while the volume of sales declined, suffering from the acceleration of inflation.
The results of Italy's parliamentary elections have handed power to the right-wing coalition led by Giorgia Meloni. The new administration will quickly be put to the test, since it will take over an increasingly struggling economy exposed to a high risk of recession this winter. Our current forecast is that real GDP will fall by 0.4% quarter-on-quarter in the fourth quarter, followed by a 0.2% q/q drop in the following quarter. The industrial sector, the first section of the economy affected by disruption linked to the war in Ukraine and the rise in production costs, is experiencing a downturn.
Although real GDP held up in Q1 (+0.1% q/q), our barometer clearly shows that the economic outlook is worsening. Annual inflation rose again in June, going from 7.3% to 8.5%, while manufacturing output stagnated: although Italy’s manufacturing PMI remained in the expansion zone at 50.9 in June, it fell for the seventh straight month and has been down 11.9 points over that period.
In contrast to the previous recessions, the Italian economy has already recovered what it lost in 2020. The carry over for 2022 is 2.6%. In Q1 2022, real GDP rose by 0.1%, with an annual growth rate above 6%. Value added for construction continued to increase, while manufacturing declined and services stagnated. The economic recovery mainly reflects the robust evolution of investment, while private consumption declined, as Italian households remained extremely cautious. Imports rose strongly, bringing the current account balance into negative territory. The economic recovery in 2021 was less intense in the Southern regions than in the Centre-North, thereby widening the gap between the two areas.
The deterioration of the business climate surveys continued in May, particularly in the manufacturing sector, even though industrial production held up until April. Output rose 1.6% m/m, to its highest level since December 2007. However, the manufacturing PMI dropped 2.6 points to 51.9 in May, its sixth consecutive monthly fall. The sharp fall in this indicator shows up clearly in our barometer.
Flows of new non-performing loans of Italian non-financial corporations (NFCs)[1] stood at 2.4% of outstanding amounts of performing loans in the fourth quarter of 2021, from 1.4% in the third. Starting from an historically low level, the significant rise in this ratio[2] is due to the flows of new non-performing loans, which increased by 67% in the fourth quarter of 2021, whilst outstanding amounts of performing loans remained relatively stable. The increase in the ratio of new non-performing loans was more marked in certain sectors (accommodation and food service activities, construction, electricity and gas supply, mining and quarrying)
The Italian economy began 2022 on a wrong footing, with a 0.2% q/q contraction in real GDP in the first quarter. The country has been hit hard by the war in Ukraine and by lasting disruption in world trade. These factors are having a particularly strong effect on economies with a large industrial base, as is the case in Italy. Inflation, which was 6.3% y/y in April (down from 6.8% y/y in March), has also had a significant negative effect on household confidence. According to the European Commission, consumer confidence increased very slightly in April (the balance of opinion rose 1.9 points to -22), but March had been the worst month since January 2014.
Inflation in Italy reached 6.7% y/y in March, the highest level since July 1991. In addition to the spectacular rise in energy prices (electricity, gas & fuel) – up 50.9% y/y – there are now significant increases in prices for food products (+5.8% y/y), furniture (+8% y/y), as well as for the hotels & restaurants sector (+4.6 % y/y). That said, two consumption items are still in deflationary territory: education (-0.5% y/y) and communication services (-2.9% y/y). Nonetheless, the hardest part has yet to come: the latest PMI survey for March showed once again a significant increase in input prices, which was the strongest on record (+6.7 points to 81.5). This will feed through to higher consumer prices: this PMI index is indeed very well correlated with the CPI.
In Q4 2022, real GDP rose by 0.6%, after having increased by 2.7% and 2.5% in Q2 and Q3 respectively. This slowdown was widespread. Manufacturing stagnated and services suffered from the upsurge of Covid-19 cases. Uncertainty is fostered by inflation which turns out to be more persistent than expected. In March 2022, the consumer price index rose by 6.7% y/y. The deterioration of the economic environment has not affected the labour market yet. In the three months to February 2022, employment increased by 100,000 units almost completely recovering the pre-pandemic level
Italy’s industrial output fell 3.4% month-on-month in January. There is now a high risk that GDP will contract again in Q1 because of the war in Ukraine and the impact of surging commodity prices on Italy’s economy. Italy is particularly dependent on Russian gas, with almost 45% of its imports coming from this country. Even if Rome is planning to carry out a drastic shift in its gas imports – sourcing gas from other countries like Algeria and Azerbaijan – and to increase its LNG consumption, these changes will take time to materialise.
Concerning the Italian economy, now that the presidential election is behind us, attention has focused again on the risks associated with surging inflation and the upcoming start of the normalisation process of ECB monetary policy. 10-year Italian government bond yields have risen by nearly 50 basis points since early February, and they could reach the 2% threshold very soon.
With less than two weeks to go before Italy’s presidential election – the first round of voting takes place on 24 January – a candidacy of the current Prime Minister, Mario Draghi, remains a distinct possibility. If Mr Draghi becomes Italy’s president, this would probably have repercussions for the current governing coalition, although it is not currently possible to predict what they might be. In the meantime, Covid-19 cases are continuing to surge, with around 170 000 new contaminations recorded in mid-January. This has prompted the government to make vaccinations compulsory for people aged over 50.
Instead of drastically restricting conditions of activity, the government only made a few adjustments to their policy for combatting the pandemic: the state of emergency was extended for three months to 31 March 2022. Despite the resurging pandemic, business prospects are still looking upbeat this winter. PMI indices are holding at high levels, especially for the manufacturing sector. In November, the manufacturing PMI rose 1.7 points to a new high of 62.8, supported by the improvement of the employment and new orders components. The services PMI also improved, up 3.5 points to 55.9. The composite PMI for the past three months has held steady compared to three previous three months, as shown in the Pulse below.
After a modest expansion in Q1 2021, real GDP rose by more than 2.5% q/q in both Q2 and in Q3. This recovery was widespread. In Q3, net exports added 0.5 percentage point to GDP growth thanks to a stronger rise in exports than imports. Thanks to the easing of social restrictions, consumption has further increased, while favourable financing conditions and fiscal incentives have supported investment. During the summer, the recovery expanded to the services sector, which benefitted from higher tourist receipts. Manufacturing production has recovered entirely from the 2020 decline, ending up 2% higher than in Q4 2019. Labour market conditions are not as good as the recovery would suggest.
After two solid quarters, Italian GDP growth is expected to slow in Q4 2021. Real GDP rose 2.7% q/q in Q2 2021 and 2.6% q/q in Q3. Yet there was an encouraging catching-up movement through the fall, which led the European Commission to revise strongly upwards its 2021 growth forecast, to 6.2%, from its previous outlook of 4.2% last spring. While a new epidemic wave could weigh on activity in the coming weeks, Italy is currently facing a level of contamination much lower than most other European countries.
Despite more than 80% of the adult Italian population having received a full vaccination schedule, the government has decided to introduce new constraints to keep the Covid-19 epidemic under control. At the economic level, the impact of this decision is likely to be felt most in the labour market, accentuating labour shortages, and particularly in the transport sector, where between 25% and 30% of workers still do not have the health pass, according to estimates from Confreta, the union for the industry.
The economic recovery has gradually gained momentum, becoming increasingly more widespread for various components and sectors. The improvement in the overall scenario has boosted optimism among companies, supporting business investment. While manufacturing activity had begun to increase in H2 2020, the services sector benefited from an upswing in consumption in Q2, despite the still disappointing international tourism trends. A wind of surprising optimism continues to blow through the Italian real-estate market, driven mainly by home purchases by many families keen to improve their housing conditions. In Q2 2021, residential sales recorded +70% growth compared to Q2 2020, and +26.1% compared to Q2 2019.
Italy is a parliamentary republic with a Prime Minister and a President. Italy, the third largest economy of the Eurozone, was still recovering from the debt and financial crisis, when the Covid-19 epidemic occurred. Real GDP plunged by 8.9% in 2020, recording one of the biggest contractions in Europe. The Covid-19 crisis is likely to have amplified the structural weaknesses of the Italian economy, which is widely seen as a low-potential growth economy with structural weaknesses. Several restrictions on both labour and production and the huge level of public debt are weighing on productivity, investment and activity growth. An imperfect match of the skills of the working population to market need and low R&D spending also affect growth.
The Italian commercial sector is characterised by family-owned companies that offer particular specialisation, often grouped into industrial districts. However, most Italian firms are small and suffer from weak productivity, which made them particularly vulnerable to the coronavirus crisis. Investment is structurally low and Italy’s integration in global value chains remains limited.
