2024 LOW GROWTH, GDP AT +0.5. HIGH INTEREST RATES AND WEAK INTERNATIONAL TRADE WEIGH HEAVILY

The Italian GDP trend in 2023 will looming large slowdown compared to 2022, when it had grown by +3.7%: in the base scenario, which does not include the effects of the measures contained in the DDL Budget, the CSC forecasts an annual increase of +0,7%, already fully acquired. Growth in 2024 is expected at +0.5%. (March estimate 1.2%).

The slowdown is due to to the negative effect of high interest rates on companies and households, and a negative trend in the current year of the international trade.

DECLINING INDUSTRIAL PRODUCTION, ESPECIALLY FOR ENERGY-INTENSIVE SECTORS

In 2022, the dynamics of industrial activity of Italian companies had increased by +0.4%, showing signs of weakening in the second half of the year. Over the two-year forecast period, production is expected to decrease by -2.3% this year and rebound very partially, by +0.8%, in 2024. Suffering mainly are the so-called energy intensive sectors (such as paper, chemicals, non-metallic metals and metallurgy), and those falling within the construction sector (wood, metal products, but also some of the aforementioned energy-intensive sectors). The production levels of these sectors are now all below the average values for 2019. As well as in 2022, the contraction of these sectors continued in the first part of this year: on average in January-August, compared to the same period in 2022, chemicals is down by -9.7%, paper by -11.6%, metallurgy by -7.1% and non-metallic minerals by -10.0%. On the contrary, greater dynamism emerges for high-tech branches such as, for instance, pharmaceuticals and computer and electronics and electrical equipment.

CONSUMPTION OF WEAK BUT RESILIENT HOUSEHOLDS

Household spending is expected to remain almost static in the second half of 2023. This will result in average year-on-year growth of +1.2%. Household consumption will pick up again in 2024, with more momentum in the second half of the year, on the back of falling inflation and, thus, a recovery in purchasing power, as well as driven by improved economic conditions and stronger wage trends, and will grow by +0.6% on average for the year.

INVESTMENT IN WORRYING DECLINE. BOOST FROM CONSTRUCTION AND INDUSTRY 4.0 FAILS. CRUCIAL NRP.

Gross fixed capital formation is expected to grow moderately in 2023 (+0.5%), below the Q2 acquisition (+0.8%). The dynamic is expected to worsen further in 2024: -0,1% the CSC estimate, in major downsizing compared to previous years (they grew by 9.7% in 2022 and will instead be stationary in 2024), mainly due to a continued restrictive monetary policy stance, which is having a more profound impact than expected and will continue to do so for a longer period, and also to the lower amount of investment made with the PNRR compared to what was planned in last April's DEF.

Looking ahead, signs from the latest qualitative data foreshadow a further decline in investment in the short term. Business sentiment weakened, with the confidence index falling in Q3 to 106.8 from 108.9.

Anvestment will be affected by the use of PNRR resources and the recovery of profits, documented at least until the 2nd quarter of 2023: this forecast scenario assumes only partial use of PNRR resources compared to what was programmed for 2023 and 2024 in the DEF of last April and therefore the boost to investment, although substantial, will be much less in the two-year period than estimated based on the resources programmed in the 2023 DEF. Regarding the effect on growth, the CsC estimates that with a fully implemented PNRR, Italian GDP in 2026 (cumulated over 6 years, from 2021) would be higher than the +2.8% and investment higher by 11.1%.

VERY WEAK FOREIGN TRADE

In the CSC scenario, Italian exports of goods and services, after an almost double-digit expansion in 2022 (+9.9%), register a setback in 2023 (+0.8%) and gradually accelerate in 2024 (+2.3%), below the average growth rates of the pre-pandemic period (+2.5% in 2012-2019) but in line with world trade.

EMPLOYMENT FOLLOWS GDP

Labour input follows GDP As was already the case in 2022, labour input, measured in terms of full-time equivalent units (FTE), will advance in 2023-2024 at a pace broadly in line with economic activity levels, albeit slightly above this year (+1.1% ALUs versus 0.7% GDP) and slightly below next year (+0.2% versus +0.5%).

LABOUR COST PER UNIT OF PRODUCT INCREASES IN 2023 AND 2024. ITALIAN INDUSTRY PENALISED, LOSES PRODUCTIVITY. 

The manufacturing cluster in Italy grew by +4.8% in 2022, more than in other European economies (+3.7% in German industry, +2.5% on average in the Euro Area). Against a more moderate dynamic in labour costs per hour worked (+2.9% compared to +4.2% in Germany and +3.9% on average in the Area), the competitiveness of Italian industry suffered from a large drop in productivity (-1.8%). Among the other large Eurozone countries, labour productivity only declined in 2022 in France, while it grew on average by +1.4% (+0.6% in Germany). In 2023-2024, the strengthening of wage dynamics in the private sector, which is lagging behind inflationary dynamics due to the contractual wage adjustment mechanism, will push up the Clup in Italian manufacturing, given also the sharp decline in labour productivity expected this year (already acquired in H1, due to the extensive labour hoarding carried out by firms) and only a marginal recovery next year.

INFLATION: BRAKING IN ADVANCED STAGE. AT 2.0% AT THE END OF 2023

Consumer price dynamics in Italy have been gradually slowing since December 2022, falling to an annual +5.3% in September 2023. This is still high compared to the ECB's target of 2.0% (Chart 18), but decidedly more favourable compared to the records reached in 2022 (+11.8% in October and November). The assumed change for the 2023 average is +5.7%. In the CSC scenario, which incorporates a moderately rising gas price from July's lows, inflation will continue to decelerate (especially in the final months of 2023, thanks to a favourable 'base effect'), back in line with the target of +2.0% at year-end. On average, it will stand at +5.8% (from +8.1% in 2022), a downward revision of -0.5 points compared to the March CSC scenario. In 2024, with the long slowdown now over, inflation is expected to remain around the end-2023 level, settling at +2.1% on average.

CREDIT IN SHARP DECLINE. NEVER BEFORE HAS LENDING TO BUSINESSES SLOWED SO SHARPLY

Bank lending to businesses in Italy is shrinking rapidly (-6.2% p.a. as of August 2023), after having reached high growth rates until mid-2022 (peak at +4.8% in August). An abrupt change, as rarely observed in time series of credit, mainly due to the rapid rise in interest rates decided by the ECB during this period. In 2023, corporate liquidity, as measured by the value of deposits in banks, decreased rapidly (-5.6% per year in August), returning to the pre-pandemic trend. The ISTAT indicator of available corporate liquidity, compared to operational needs, has so far held just below pre-pandemic values, but only because the need for liquid resources has shrunk. The situation in the coming months may soon turn into a liquidity shortage, if credit continues to shrink. The companies most in need of credit for liquidity are manufacturers of consumer goods.

PUBLIC FINANCE

High public deficit, but in reduction. In the 'unchanged legislation' scenario, general government net borrowing is projected to decrease to 5.3% of GDP in 2023 from 8.0% last year and to 3.8% in 2024, broadly in line with what was indicated in the Update Note to the Economic and Financial Document (NaDEF) presented by the Government at the end of September (5.2%).

Debt does not go down.  Public debt as a ratio of GDP is estimated at 140.1% in 2023, down 1.5 points from 2022, on similar values to those estimated by the government. For next year, it is projected to rise by more than 0.4 points to 140.6% of GDP instead of falling to 139.7% as shown in the NaDEF 2023 trend framework.

**********

THE RISKS AND VARIABLES OF FORECASTING

In the current environment, the forecast scenario presents mostly downside risks, but also some upside risks.

1. A new tragic chapter of the israeli-palestinian conflict opened just as this report was being written. A prolongation of the war and a possible enlargement of the countries involved could further increase geopolitical fragmentation, with negative effects on international trade; push up the price of oil and other energy commodities again.

2. Consumer price dynamics in Italy and Europe have embarked on a path of gradual normalisation. The ongoing process may take less time than expected, prompting central banks to accelerate the decline in interest rates and thus anticipating the positive effects of monetary policy easing.

3. Central banks are expected to embark on an uncoordinated path of rate cuts in the coming quarters. However, if the FED decided on further increases, in order to bring inflation down even further, the ECB could follow it to avoid exchange rate effects that would otherwise push up the euro prices of oil and other imported commodities. This would have an additional restrictive impact in the Eurozone and Italy.

4. The full effectiveness of the PNRR is conditional on adherence to the timetable and implementation of the planned reforms. The failure of one of these elements would imply a lower contribution to growth. The prudential assumption underlying this scenario is that in the two-year period 2023-2024 there will be only partial utilisation of the resources that were programmed in last April's DEF.

5. A further risk concerns the dynamics of theChinese economywhich in the forecast scenario is assumed to grow this year and next according to the targets set by the government (+5% in 2023 and +4.5% in 2024). A slowdown could lead to an international setback: one point less growth would reduce world GDP by about two tenths.