The EU Commission revises the estimates for Italy upwards, but inflation is holding back growth: the Pnrr is fundamental

Inflation is holding back growth in Italy, which is in any case slightly better than expected, and if it is unable to reverse course in 2024 it will come back last due to expansion of the gross domestic product. Deficits and debt are reduced, but in terms of competitiveness there is the risk of remaining at a standstill. The European Commission’s spring economic forecasts outline a positive picture for the country system that is only up to a certain point. In general, things are improving. Inflation still bites, but less than in previous months, energy prices have come down and there are fewer bottlenecks in terms of trade flows. All this leads to a general improvement, the EU will grow by 1% in 2023 and 1.7% in 2024. Figures revised upwards compared to the estimates of a few months ago (0.8% and 1.6% respectively) , as for the Eurozone to which it belongs: 1.1% growth this year, 1.6% the next (compared to 0.9% and 1.5% estimated in winter).

“The European economy is in better shape than expected last autumn,” says Economy Commissioner Paolo Gentiloni. “We have avoided a winter recession and are poised for moderate growth this year and next.”

Italy, more growth but still weak. The Pnrr is fundamental

In the wake of this general improvement, the Commission raises its estimates for Italy as well. Brussels acknowledges 0.3% more growth for the current year and 0.1% more for 2024. This means that GDP will expand to 1.2% in 2023 and 1.1% in 2024. If this year there are those who grow less, next year Italy will bring up the rear again, with the lowest growth rate in the eurozone and the EU.

It will be necessary to implement the national recovery plan (Pnrr) and know how to spend the money from the Recovery Fund that is needed to finance it. Because the Commission bases its estimates on the assumption that Italy does what it has to. “The launch of projects funded by the Revovery Fund is expected to support investment, including in intangible assets for the digital transition.”

Declining deficit and debt

The good news for Italy concerns the public finances. The trajectory of deficit and debt turns downward. The deficit/GDP ratio is expected to fall to 4.5% of GDP compared to 8.6% in 2022, in the wake of the partial elimination of energy support measures, to then further decrease in 2024, settling at 3.7% , in any case above the reference threshold of 3%. in the EU grappling with the reform of the stability pact this risks being a problem. The measure under negotiation provides that for those exceeding 3% a reduction of half a percentage point per year must be produced.

Debt also decreases. From 144.4% in relation to GDP in 2022, it is expected to be 140.4% at the end of this year and 140.3% next year. “Tax revenues continued to benefit from strong growth in nominal GDP and the impact of past provisions to enhance collection, which more than offset the reduction in the tax wedge on labour.” This is how the Commission explains the improvement in the state of public finances, as well as with the elimination of measures against high bills. However, the Commissioner for an Economy that Works for People, Valdis Dombrovskis, insists: “With energy prices clearly falling, governments should be able to phase out support measures and reduce their debt.”

Downside risks

Gentiloni warns that uncertainties remain, and that therefore we must be ready. In the Eurozone, inflation is expected to peak this year, so it is expected to fluctuate around 5.8%, before falling to 2.8% in 2024. Similar dynamics for Italy (6.1% in 2023, 2.9% in 2024), provided that no new shocks occur. Nor an indiscriminate expense. Because «expansionary fiscal policies could fuel inflation», warns Brussels.