Italian American Heritage Day: Where is the Italian economy heading?

Italian American Heritage Day was earlier this month. We reached out to Silvia Ungaro, a Senior Advisor in Italy, to get a look into the Italian economy.

Specifically highlighting the economy’s position so far this year, where it’s expected to end up at the end of 2023, and leading into 2024. In comparison to years prior, there are some significant shifts. Compared to past years, the most drastic changes we see are in the GDP growth, inflation, investments, and domestic and foreign demand.

For 2023, real GDP growth is expected to slow to 1.2% and then 1.1% in 2024. This growth will be held back by high inflation, tightening of monetary policy, and a sluggish external environment. However, the inflation rate is set to moderate to 6.1% this year thanks to falling energy prices and decrease further to 2.9% in 2024. The inflation rate is set to moderate to 6.1% this year, thanks to falling energy prices, and decrease further to 2.9% in 2024.

Regarding investments, construction continues to show the highest growth (+1%), followed by investments in machinery (+0.8%), and investments in intellectual property (+0.3%). In 2023, the process of capital accumulation is expected to grow (+3%), slowing down compared to the last two years. In relation to domestic and foreign demand, changes in inventory will make a moderate negative contribution (-0.1%). The expansion of the Italian economy will continue in 2024 with the GDP increasing again by 1.1%, supported by the contribution of net domestic demand from inventories and to a lesser extent by net foreign demand.

There are a few major strengths and weaknesses to be seen in 2023. Italy has a well-diversified export sector which helps to stabilize the economy. Also, the manufacturing sector is robust and contributes significantly to the country’s GDP. A large portion of Italy’s public debt is held domestically which can provide a buffer against external shocks creating a strong domestic investor base for public debt.

While there is a strong investor base for public debt, Italy has one of the highest levels of public debt in the world which can pose challenges for fiscal sustainability. There is also elevated uncertainty surrounding future government policies which could deter investment and slow down economic growth.

Moving forward, Italian banks entered 2023 in a position of strength, but will be tested by an economic downturn, potentially volatile credit markets, and the end of cheap and stable European Central Bank funding.