Italian economy headed for a tough year

Italy’s debt down to 140.6% of GDP but economic deceleration predicted

Business News

In its most recent projection, the Bank of Italy anticipates a further deceleration in the country’s economy in 2024, coupled with a rise in inflation. However, Eurostat announced today that Italy’s debt to GDP ratio was down in the third quarter of 2023.

Italy’s debt-to-GDP ratio was 140.6% at the end of the third quarter of 2023, down from 142.5% in the second quarter, Eurostat said on Monday.

It said the drop of 1.8 percentage points was the fifth largest decrease in the EU in the period in question. The EU’s statistics agency said the eurozone’s debt-to-GDP ratio fell to 89.9%, down from 90.3% in the second quarter of last year.

Eurostat also said Italy’s debt-to-GDP ratio remains the second-highest in eurozone after Greece’s at 165.5%.

Bank of Italy predicts economy deceleration

Last week, the Bank of Italy Governor Fabio Panetta said Wednesday that the Italian economy was slowing, and growth would come in at under 1% this year.

“We are in a phase of cyclical slowdown, last quarter we grew sluggishly, as did (the rest of) Europe,” Panetta told a meeting of Italian Banking Association ABI’s executive committee. “There is a boost from consumer spending, and this is positive, thanks to the resilience of employment levels.

“We expect 2023 to have ended with GDP growth of between 0.6 and 0.7 and it will be below 1% for 2024 and then rise to 1% in 2025”.

Core inflation, excluding energy and food, remains at 3.1%, as of the December figures. Measures implemented to mitigate the impact of rising energy prices, such as a 22% VAT rate on gas, are being lifted, leading to another surge in inflation.

Financial landscape is concerning with decline in investment

The financial landscape of Italy is poised to remain a significant concern this year, given the precarious state of its public finances. Despite the need for more workers across various industries, efforts to attract foreign workers may be hindered by the growing influence of far-right ideologies.

Investment, particularly in the construction sector, witnessed a significant decline in 2023.

According to GlobalData, a further contraction of 8.6% is projected for this year, alongside diminishing employment, permits, and residential approvals.

Fitch Solutions predicts a slowdown in consumer spending and investment compared to the previous two years, estimating GDP growth in 2024 to be 0.3%, below the initial estimate of 0.8%.

Softening Labour Market

A slowing economy tightens financial conditions, and it is predicted the European Central Bank (ECB) will maintain its rate at 4% until October, potentially impacting business and manufacturing activity.

With a substantial portion of loans in 2023 being floating-rate loans, an increase in interest rates could result in higher interest payments, affecting both businesses and individuals and potentially leading to a softening of the labour market. The rating agency anticipates unemployment to reach 8.5% by the end of 2024, compared to 7.6% in Q2 of 2023 in Italy.

Diminishing employment levels and slowing wage growth are expected to exert additional pressure on consumers and their spending habits. For instance, the mortgage rate in August 2023 rose to 4.3%, up from the previous 3%, impacting consumers’ disposable income.

Climate Concerns

Italy is grappling with an increasing frequency of climate disasters, exemplified by the catastrophic floods in 2023.

If this trend persists in 2024, Italy may face a series of extreme weather events with potentially hazardous effects on its socio-economic landscape. The second year of El Nino typically brings warmer conditions, suggesting climatic challenges for Italy in crucial sectors like health, energy, and food.

G7 Leadership Challenge

The year commenced with Italy assuming the presidency of the G7 from Japan, posing a significant challenge amid ongoing national issues such as slow GDP growth, an immigration crisis, and a soft labour market. Against the backdrop of the Russia-Ukraine conflict and the Israel-Gaza crisis, the global scenario appears daunting.

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