The governor of the Bank of Italy: “Inflation? This is a tax that will fall in 2023. However, maximum attention must be paid to the price-wage spiral, it must be avoided”
“The marked recovery of the economy was decisive in stopping the increase in the ratio of public debt to GDP, which at the end of 2021 could have fallen to values close to 150%, from around 156%, a level significantly lower than what expected at the beginning of last year and also in the official assessments published in the autumn ”. This was stated by the governor of the Bank of Italy, Ignazio Visco, in his speech at the Assiom Forex congress taking place in Parma. “In the presence of a better than expected primary balance but still largely in deficit, the decrease in the debt burden compared to 2020 reflected the strong difference, negative for more than 5 percentage points, between the average interest burden and the nominal growth of the ‘economy, ”he continued.
“This result, despite the exceptional circumstances that determined it, with reference to both the recovery of activity levels after the deep recession and the extremely expansionary monetary conditions, clearly shows the importance of economic growth for the pursuit of a gradual reduction of the debt burden ”, added Visco.
With the consolidation of the recovery of the Italian economy “it will be necessary to pursue a progressive, continuous structural rebalancing of public finances, which is also necessary to avoid fueling tensions on the government bond market”, said the governor. The budget maneuver, he stressed, “determines an increase in net debt, compared to the framework under current legislation, of about 1.3% of GDP on average per year in the three-year period 2022-24. In a still characterized phase from a high level of uncertainty about the developments of the pandemic, an expansionary maneuver was deemed necessary to contain the risk that a premature reduction of the fiscal stimulus could have a negative impact on the growth potential “.
Visco explained that “the risks to which the need to place securities worth around 400 billion annually exposes us remain high. In recent years they have been mitigated by the Eurosystem’s massive purchase programs aimed at countering deflationary pressures and the economic fallout of the pandemic crisis “. Over the next decade “the differential between the average debt burden and GDP growth will have increasingly less favorable effects on the debt ratio, due to the inevitable normalization of the economic growth rate and short and long-term interest rates. Population aging will also tend to exert upward pressure on primary current expenditure “.
To counterbalance these trends, the Bank of Italy governor continued, “on the one hand, an increase in development potential and, on the other hand, a gradual and structural improvement of the primary balance will be necessary. yield between Italian government bonds and those of the other main countries in the area. The greater the pace of economic growth, the less will be the correction of public accounts necessary to favor the progressive reduction of the ratio between debt and output “.
INFLATION – “The pressures on the final prices of goods and services would be more prolonged than initially estimated, but should be reabsorbed in 2023”. Since the second half of 2021 “in many countries there has also been a significant, for the most part unexpected, rise in inflation. On the supply and cost side, the marked increases in the price of energy from fossil sources, bottlenecks in production chains and the increase in international transport costs have contributed above all to this ”. “In recent months, the increase in prices has been higher than expected in December and tensions on the energy front have not yet eased. Although it is probable that the expected reduction in inflation will be confirmed in the coming months, the risks of a disengagement of expectations and the start of a run-up between prices and wages, of which there is no evidence at the moment, must be carefully monitored “.
“The increase in the costs of energy raw materials currently determines a negative change in the terms of trade, and therefore a reduction in the purchasing power of income in the euro area. On average in 2021, the loss associated with the deterioration of the terms of trade was limited to around 1%. However, it went up during the year, reaching over 2% in the fourth quarter “. Visco explained that “it is essentially a tax, probably in large part destined to return, the most distorting effects of which can be offset, where possible, by public budgets. However, the increase in costs must not turn into a prolonged inflationary spiral.