OECD alarm, Pnrr delays could reduce Italy’s growth

“Delays in the implementation of the Recovery and Resilience Plan could reduce Italy’s GDP growth”: this is the warning launched by the OECD in the Economic Outlook 2023. According to the international organization, rather, “the rapid implementation of structural reforms and public investment plans in the Pnrr will be essential to support short-term activity and lay the foundations for sustainable growth in the medium term”, as well as having “the further advantage of exerting further downward pressure on the debt ratio /GDP».

The OECD underlines that «the reforms underway in the public administration, the judiciary and the competition system are well advanced and remain essential for increasing GDP in the medium term. But spending by NewGenerationEU funds is clearly lagging behind, with cumulative spending at the end of 2022 being around 50% below initial spending plans, mainly reflecting delays in the implementation of public investment projects. For this reason, according to the Paris economists, “the priority should be to quickly replace non-feasible projects with feasible projects and strengthen the public administration’s ability to act efficiently, manage and implement the public spending projects envisaged by the Pnrr. These projects basically include infrastructure spending to facilitate the digital and green transitions, as well as the expansion of public childcare services to promote women’s labor market participation in a context of rapidly declining population age work”.

OECD: Italy’s GDP +1.2% in 2023, +1% in 2024
Italy is expected to record “modest growth” in 2023 and 2024, with GDP slowing from 3.8% in 2022 to 1.2% this year and 1% next. The OECD always writes it in the Economic Outlook. “The risks for growth – we read – are substantially balanced” also thanks to the high savings of households “which could lead to a faster rebound in domestic demand” than expected. “On the contrary – warns the OECD – negative effects from the recent turbulence of the international banking sector or further delays in the implementation of public investment projects of the Pnrr could slow down growth”.

As regards instead the evolution of the cost of living, «overall, the combination of lower energy prices, more restrictive financial conditions and moderately restrictive fiscal policies should lead to a gradual easing of inflationary pressures while allowing a modest recovery of the activity”. The report then underlines that «after a contraction in the fourth quarter of 2022, real GDP increased by 0.6% in the first quarter of 2023. Recent high-frequency indicators point to modest growth in the near term».
And while industrial production and retail sales “remain contained, business and consumer confidence has strengthened compared to recent months. The unemployment rate is historically low, there are many vacancies, and employment continues to grow strongly, despite the shrinking working-age population. The buoyant labor market and recent falls in energy prices are stabilizing real household incomes, supporting a modest recovery in private consumption in the first half of 2023».

Paris economists also report that euro area monetary policy tightening has led to a significant increase in borrowing costs for households and businesses, with bank lending rates rising by more than 2 percentage points over the past year. «The government – they still recall – will gradually eliminate the fiscal measures to cushion the impact of the shock on energy prices for households and businesses in mid-2023. Most of the measures to support the energy crisis adopted in 2022, such as deductions taxes on corporate electricity bills, reductions in fixed charges on gas and electricity, as well as targeted income support for low-income households – have been extended until the first half of 2023. But generosity has been curtailed and some inefficient measures in cost-effective and non-targeted, such as the reduction of excise taxes on fossil fuels, have been abolished.

OECD, the world economy is improving but fragile and uncertain
«Global economic developments have started to improve, but the recovery remains fragile» continues the OECD Economic Outlook according to which «global GDP growth is expected to decrease from 3.3% in 2022 to 2.7% in 2023 , before reaching a still modest 2.9% in 2024». As chief economist Clare Lombardelli says, “The global economy is turning a corner, but faces a long and winding road to achieving strong and sustainable growth.” The prospects still remain “significantly uncertain” and among the reasons of greatest concern are inflation and the war in Ukraine.

OECD: “Difficult challenges, monetary policy is ready. Governments act decisively, central banks vigilant”
The need to permanently lower inflation, adjust fiscal policy support and relaunch sustainable growth “creates difficult challenges” for government and central bank leaders in OECD countries. This is the warning launched by the Economic Outlook 2023. “Policy makers must act decisively on macroeconomic and structural policy to achieve stronger and more sustainable growth,” says chief economist Clare Lombardelli. A “difficult” undertaking, he explains, also because “core inflation remains too persistent, debt levels are too high and potential production is too low”. On the monetary policy side, however, central bankers “have to a difficult road”. Indeed, although the cost of living is decreasing thanks to lower energy prices, “core inflation remains stubbornly high, more than previously expected”.

And precisely for this reason “the banks must maintain restrictive monetary policies until there are clear signs that inflationary pressures are easing”. And, indeed, “some economies grappling with stubbornly high core inflation could require further increases in interest rates”. But central banks must still remain vigilant, and in the event of further stress on the financial markets following the rise in rates, “they should employ policy instruments to increase liquidity and minimize the risks of contagion”. In all this, however, “clear communication will be essential to avoid confusion on the potential conflict between the pursuit of price stability and financial stability”. As far as the role of tax policy makers is concerned, according to Lombardella “the choices are clearer but not easier to implement”. Indeed, fiscal policy has played a key role in supporting the global economy through the shocks of the pandemic and the war in Ukraine. But now most countries are grappling with higher deficits and higher debt. “As the recovery takes hold – he therefore suggests – the support should be reduced and better targeted”. And limited resources “should be directed only to those who truly need them and to high-priority investments in productivity improvement, including those that drive the green transition and improve labor supply and skills.”