IMF Executive Board Concludes 2022 Article IV Consultation with Italy

IMF News, August 1, 2022

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Published: August 1, 2022

Overview

On July 27, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Italy.
The Italian economy rebounded vigorously from the COVID-related drop in output and has avoided economic scarring.
Employment and labor force participation have fully recovered.
Banks’ nonperforming loans have continued to decline and their capital positions have strengthened.
New challenges: war in Ukraine, COVID-related disruptions to global supply chains, higher energy prices, broader inflationary pressures, shortages of key products, slowing global demand, and a severe drought in the Northern part of the country.

Short-term outlook and risks

Growth projections:
- 2022: expand by 3 percent (mostly on strong carryover from last year).
- 2023: further slowdown to around ¾ percent.
Inflation projections:
- Annual average inflation is expected to peak in 2022 at 6¾ percent and to moderate gradually thereafter.
Medium-term:
- As energy prices moderate and with public investment under the National Recovery and Resilience Plan (NRRP), growth is forecast to pick up in subsequent years.
Key downside risks:
- A further spike in energy prices and/or a rapid tightening of financial conditions could compress growth and weigh on fiscal consolidation.
- Difficulties delivering NRRP investments and reforms would reduce demand support, weaken longer-term productivity enhancements, and delay EU financing.
- Sustained high inflation could erode recent external competitiveness gains.
- A complete suspension of Russian energy imports in the coming months could reduce output significantly this year and next relative to the baseline.
Other pressures:
- Yields on Italian government bonds have risen and spreads have widened on prospective monetary policy tightening and political uncertainty.
- The severe drought will further pressure food prices and exacerbate energy security challenges.

Executive Board Assessment

Directors commended the authorities’ effective pandemic policy response that delivered a robust and full recovery.
Directors noted major new challenges from elevated energy prices related to Russia’s invasion of Ukraine, tightening financial conditions, global supply chain disruptions, and political uncertainty.
Risks associated with Italy’s high public debt were highlighted, given longstanding weak productivity.
Fiscal guidance:
- Need for sustained, decisive improvements in fiscal balances, commencing this year by saving part of revenue overperformance.
- Rationalize current spending, broaden the tax base, strengthen tax compliance, and implement growth-enhancing reforms (public administration, civil justice, and competition) to achieve and maintain a sizable primary surplus and keep public debt on a firmly downward path.
Energy and social measures:
- Commended pre-emptive efforts to strengthen energy security.
- Recommended that compensation for higher energy prices be temporary and targeted, and that price signals be retained.
Banking sector:
- Welcomed resilience of the banking sector but suggested caution given the highly uncertain outlook.
- Banks should prepare for severe downside scenarios; temporary capital conservation may be warranted in specific cases.
- Continued close monitoring, including of smaller and weaker banks, is important.
- More efficient debt restructuring to help firms avoid financial distress would be necessary.
- Commended progress in implementing the FSAP recommendations and encouraged prioritizing key remaining recommendations.
NRRP and reforms:
- Welcomed commitment to the National Recovery and Resilience Plan and timely implementation of Next Generation EU-related targets and milestones.
- Recommended continued progress to lift labor productivity, investment, and potential growth, and to accelerate the green transition.
- Improving carbon tax design, making green investment incentives more cost-effective, and streamlining approval procedures for investments in renewables would help decarbonization and energy security.
- A number of Directors saw merit in a coordinated EU approach on carbon taxation.
- Encouraged continued strengthening of the anti-corruption and AML/CFT frameworks.

Selected economic indicators, 2019–23

Output
- Real GDP growth (%): 2019: 0.5; 2020: -9.0; 2021: 6.6; 2022: 3.0; 2023 (Proj.): 0.7
Employment
- Unemployment (%): 2019: 9.9; 2020: 9.3; 2021: 9.5; 2022: 8.8
Prices
- Inflation (%, pa): 2019: 0.6; 2020: -0.1; 2021: 1.9; 2022: 6.7; 2023 (Proj.): 3.5
General Government Finances
- Revenue (% GDP): 2019: 46.9; 2020: 47.4; 2021: 48.3; 2022: 48.6
- Expenditure (% GDP): 2019: 48.5; 2020: 57.0; 2021: 55.4; 2022: 54.2; 2023 (Proj.): 52.2
- Fiscal balance (% GDP): 2019: -1.5; 2020: -9.6; 2021: -7.2; 2022: -5.6; 2023 (Proj.): -3.9
- Public debt (% GDP): 2019: 134.1; 2020: 155.3; 2021: 150.9; 2022: 147.7; 2023 (Proj.): 146.3
Money and Credit
- Credit to the private sector (% change) 1/: 2019: 0.2; 2020: 4.7; 2021: 2.1; 2022: . . .
- Corporate bank loan rates under 1 million euros (%): 2019: 1.8
Balance of Payments
- Current account (% GDP): 2019: 3.2; 2020: 3.7; 2021: 2.4; 2022: 1.2
- Outward FDI (% GDP): 2019: 0.1; 2020: 0.0
- External debt (% GDP): 2019: 124.2; 2020: 139.9; 2021: 137.6; 2022: 137.2; 2023 (Proj.): 137.1
Exchange Rate
- REER (% change): 2019: -2.4; 2020: -0.2; 2021: …

1/ Twelve-month credit growth, adjusted for securitizations.

IMF Executive Board assessment transmitted to the authorities at the conclusion of the Article IV consultation.

IMF Executive Board Concludes 2022 Article IV Consultation with Italy

Source details

Other formats

Bibliographic details

Overview

Short-term outlook and risks

Executive Board Assessment

Selected economic indicators, 2019–23

References