The Italian Economy: Solid economic growth but bumpy road ahead

Italy has been in a difficult economic situation for many years. The pandemic made the economic and social Italy has been in a difficult economic situation for many years. Initially, the pandemic made the economic and social problems even worse. After a solid economic recovery in 2021, I am cautiously optimistic for Italy and the Italian economy. Despite various remaining problems, there is hope for new dynamism after the pandemic. After an economic contraction of 9 percent in 2020, economic expansion may have amounted to 6.5 percent in 2021 followed by a growth rate of 4.7 percent in 2022 and an expansion of around 2.4 percent in 2023. Inflation will likely exceed two percent in 2022 before averaging approximately two percent in 2023.

In 2020, the coronavirus pandemic caused a health crisis and a severe recession in Italy leading to a decrease in economic output of nine percent. Economic recovery has been solid so far. My cautious optimism regarding the Italian economy has been confirmed so far. In 2021, the economy probably expanded by well above six percent. The availability of vaccines greatly helped improve the situation. However, it has remained always obvious that virus mutations could make the situation worse again. The so-called omicron mutation currently shows us that some or all the available vaccines might not be fully effective against new mutations. Increased uncertainty and new restrictions to curb the rapid spread of omicron will weigh on economic activity in the first quarter of 2022. Private consumption expenditures – particularly related to personal services – will probably stagnate. Some modest growth rates can be expected, however, for private investment and public spending.

Expansionary fiscal and monetary policies will support the gradual recovery of the economy and the labor market. But the situation will continue to be difficult for a considerable number of people. Monetary policy of the European Central Bank will continue to be expansionary, although the scale of the quantitative easing programs will be gradually reduced in 2022. Inflation will be well above two percent inflation target in 2022. Interest rate increases are generally not expected for 2022. However, I think that a first interest rate increase might be adopted in this year, because my expectations for inflation are somewhat higher than the consensus forecast (I still expect that inflation pressures will be lower in 2023 than in 2022, but price increasing will remain somewhat higher than in the pre-pandemic period).

Importantly, Italy will receive financial support from the recovery fund of the European Union (probably more than 200 billion euros). Many effects of these public expenditures will be relevant for the medium term, but there might also be some smaller short-run impacts. These funds are planned to be used, among others, for infrastructure projects such as high-speed trains, “green” energy, and projects surrounding the “digital economy”. One may expect that the recovery fund will lift the gross domestic product of Italy by around 4 percent in the coming years. In the years to come, the further accumulation of public debt might be a burden and the government should aim at gradually achieving a balanced budget to bring the debt-to-GDP ratio gradually down again in the medium term. The new prime minister, Mario Draghi (the former ECB president), is trying to implement sensible measures to reform the Italian economy. One should not expect miracles, but I am cautiously optimistic for the Italian economy. It has a lot of potential such as a lot of productive small and medium-sized firms and skilled people.

I expect a solid growth rate in 2022. For the whole year 2022, my current forecast is 4.7 percent. The recovery will then slow down to more “usual” rates in 2023. Currently, I expect a growth rate of 2.4 percent. Inflation will be above two percent (the target of the ECB) in 2022 and average around two percent in 2023. The situation on the labor market will also gradually improve, but remain difficult for a considerable number of people. As mentioned above, my expectations for inflation are somewhat higher than the consensus forecast but I still expect that inflation pressures will be lower in 2023 than in 2022. However, price increasing will remain somewhat higher than in the pre-pandemic period. This does not have to be a bad thing. In my view, it will reflect somewhat higher economic dynamism in the euro area and Italy.

For the medium-term, I am cautiously optimistic that the Italian economy will be able to deliver higher productivity and growth rates than in the past decades where economic output and household incomes almost stagnated on average.

Do you want to contact me? Email: info@eagle-economist.com

Processing…
Success! You're on the list.

Some of my blog posts and economic forecasts are first reserved to my paying subscribers. After two weeks, all articles are publicly available. If you would like to get instantaneous access or to support my work in general, you can subscribe for 5 US dollars per month (or the equivalent amount in your currency). You can unsubscribe at any time: 

You can contact me at: info@eagle-economist.com

%d bloggers like this: