Economic growth of 0.6% expected for 2023

The EY Italian Macroeconomic Bulletin report analyzes the performance of the main macroeconomic indicators in 2022 and anticipates the trends for 2023

Between the post-pandemic recovery and the recession due to the conflict in Ukraine, how does 2022 end? What should we expect for the new year? To answer these questions, EY Italian Macroeconomic Bulletin analyzes the main macroeconomic variables, international dynamics, economic indicators, elaborating a picture of the current situation of the Italian economy and providing medium-term forecasts, based on a new proprietary macroeconometric model, created in collaboration with the Department of Economics of the University of Bologna. Here are some previews of the main data of the report for our country: the expected growth for 2023 is 0.6% against 3.8% in 2022, the inflation rate should drop from 8.2% to 7.1% next year, the estimated public deficit would 5% to 4.1%, the unemployment rate would be just under 8%.

The world economy is in a period of great uncertainty that emerged with the war in Ukraine with consequences that are reflected in the main macroeconomic indicators. For example, global real Gross Domestic Product (GDP) is expected to grow by 1.3% in 2023, compared with 3.1% growth in 2022 and an average of 2.7% over the last decade.

Nonetheless, the growth rate of prices, which in OECD countries records an expected increase of 9.4% in 2022, is about six times higher than the average for the period 2013-2019. The weight of such high inflation has a particular impact on the production costs of businesses, leads to a reduction in the real income of households and forces central banks to restrictive monetary policies with a consequent slowdown in economic activity.

Among the main challenges to face is that of the tensions on the energy market, characterized by the sharp increase in oil and natural gas priceswhich from the beginning of 2019 to the end of November 2022 increased respectively by 54% and 392%, despite a recent decline due to the decrease in overall gas demand, but also to a European-level action plan to try to counter the price fluctuations.

The general price increase is also connected to the problems along the value chains that characterized the global economy during the acute phase of the pandemic and which created bottlenecks in the supply chain. These problems have partially decreased in recent months thanks, for example, to the reduction in delivery times for goods and the elimination of backorders.

Economic uncertainty and rising prices have caused a change of course in the monetary policy of the major central banks which has led to a interest rate increase of reference, such as to make investments more onerous for businesses and negatively influence the demand for goods and services. Added to this is the termination of some bond purchase programs by the ECB, with the consequent increase in the interest rates paid on public debt, as evidenced by the analysis of the yield on 10-year Italian government bonds. The increase recorded will have an impact on public debt issues in the future, with greater pressure on state finances and on the sustainability of the debt itself, which in Italy stands at around 150% of GDP.

In November 2022 theinflation overall in Italy it stands at 11.8% compared to the same month of 2021, in Germany at 10%, in France at 6.2%. With regard to the weight of the individual components on the trend of the consumer price index (CPI), the data in the report show that although the energy component is the one that has recorded the greatest increase, it has a weight of around 10% of the total, which is why these dynamics are only partially reflected in the CPI.

Indeed, the services sector has a much greater influence on the definition of the inflation rate (38.7% in 2022) than the energy sector. Another indicator influenced by high inflation is the growth in the nominal value of wages which should increase in order to counter the reduction in consumers’ purchasing power, risking triggering further upward pressure on prices.

“The Italian economy showed strong dynamism in the first three quarters of 2022, mainly driven by the domestic demand for household consumption and investment, continuing along the path of recovery from the pandemic crisis already undertaken in 2021. However, the indicators show an uncertain outlook for the current and subsequent quarters, as a consequence of high inflation and its effect on households’ real disposable income and on costs of businesses. Consumption is expected to increase slightly from the second quarter of 2023 and exports, albeit slowing down, will once again make a net positive contribution to growth. Investments will be growing, but we estimate a slowdown due to a weaker and more uncertain economic picture, as well as higher interest rates. Finally, the Pnrr will play a fundamental role in keeping GDP on a growth path”, commented Mario Rocco, Partner EY, evaluation, modeling and economics leader.

In Italy, the data indicate constant economic growth which has been going on consecutively for seven quarters, albeit with a slowdown recorded in the third quarter of 2022. In fact, in this period, GDP grew by 0.5% compared to the previous quarter and by 2. 6% compared to the same quarter of 2021. The main contribution to the growth recorded already last year and continued in the first 9 months of 2022 is due to household consumption and investments. Specifically, investments represent the most dynamic component of GDP with an increase of around 20% compared to the third quarter of 2019. Consumption also experienced considerable growth, returning to align with the pre-pandemic phase.

The EY econometric model estimates a slight contraction in GDP for the fourth quarter of the year compared to the previous quarter, due in particular to a reduction in household consumption which should also continue in the first months of 2023 and then stabilize over the course of the year . Forecasts also indicate a slowdown in exports and investments, due to the uncertain economic scenario and high interest rates. In this sense, the public investments envisaged by the Pnrr will have a central role in supporting the growth of overall investments and therefore of the GDP.

The EY report indicates for Italy real GDP growth of 3.8% in 2022 and 0.6% in 2023, while the inflation rate is expected to go from 8.2% in 2022 to 7.1% in 2022. 2023. The public deficit should reach 5% in 2022 and 4.1% in 2023, while the public debt should fall to 145% of GDP, while the labor market is expected to expand slightly with the unemployment rate expected just below 8%.