IMF Executive Board Concludes 2023 Article IV Consultation with Italy
IMF News, July 26, 2023
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- Published: July 26, 2023
Overview
- The Executive Board concluded the Article IV consultation with Italy.
- The Italian economy grew by 3.7 percent in 2022.
- Private consumption rose robustly on recovery in employment, buoyant tourism, and extensive fiscal support of real purchasing power.
- Growth in services and construction offset weakness in manufacturing, especially in energy-intensive industries affected by high energy prices.
- Consumer prices increased largely on surging energy prices.
- Financial conditions tightened considerably and yields on Italian government bonds rose as monetary policy tightened.
- The labor market performed strongly; nominal wages have risen but real wages fell.
- Banks’ capital and liquidity buffers remained broadly stable at comfortable levels and NPLs declined further, but risks remain elevated amid the uncertain outlook and future path of monetary policy.
- Extensive policy support and rising interest costs kept fiscal deficits very high.
- The public debt ratio declined but remains very high.
- A declining working-age population could lower growth over the longer term.
Economic Outlook and Projections
- Growth is forecast to moderate to 1.1 percent in 2023 and to 0.9 percent in 2024, and then to pick up temporarily to 1.1 percent in 2025.
- Headline inflation is projected to decline steeply to 5.2 percent in 2023 and to 2.5 percent in 2024, driven by lower energy and food prices.
- Downside risks dominate the outlook, including:
- A sharper tightening of monetary policy transmitting asymmetrically to Italy and further raising borrowing costs.
- Renewed global financial stress reducing funding availability, causing public and private spending to retrench and reviving concerns about sovereign-bank-corporate linkages.
- Policies that slow public debt reduction or prolonged delays in receiving NextGenerationEU (NGEU) disbursements raising financing concerns.
- Renewed jumps in energy prices, fragmentation of foreign trade and investment, or a generalized decline in external demand negatively affecting growth.
Executive Board Assessment — Key Messages
- Directors commended Italy’s resilience to sequential adverse shocks and the strong recovery in output and employment.
- Concerns highlighted:
- Fiscal deficit has widened sharply.
- Public debt ratio is very high.
- Core inflation remains elevated.
- Declining working-age population could lower economic growth over the longer term.
- Policy priorities recommended by Directors:
- Decisively lower the public debt ratio and sustain steady, decisive debt reduction over the medium to long term through a strong primary surplus.
- Frontload fiscal adjustment by saving part of revenue windfalls and spending more efficiently, while some Directors considered the authorities’ planned near-term adjustment adequate.
- Consolidation underpinned by well-defined and efficient measures, including a base-broadening tax reform, continued action on tax compliance, and pension reform.
- Grow primary current spending below the pace of nominal GDP to carve out room for public investment.
- Prudently manage publicly-guaranteed loans while strictly limiting new guarantees.
- Preserve financial stability amid tightening monetary policy and rising funding costs; maintain adequate headroom on capital and liquidity on a forward-looking basis.
- Avoid banks’ recourse to public-sector backstops where possible.
- Continue efforts to strengthen the AML/CFT regime.
- Implement comprehensive and ambitious structural reforms to raise productivity and potential growth, resolve bottlenecks to critical investments, and promote competition and transparency.
- Boost productivity and labor force participation and close the gender employment gap, including through improved education and better tax incentives.
- Accelerate clean electricity capacity to strengthen energy security and support climate targets.
- Timely and effective implementation of the National Recovery and Resilience Plan supported by NextGenerationEU (NGEU) funding.
Fiscal and Financial Sector Notes
- Extensive policy support and rising interest costs kept fiscal deficits very high.
- The public debt ratio declined but remains very high; Directors underscored the importance of decisively lowering the public debt ratio and welcomed the authorities’ commitment.
- Banking sector:
- Improvement in banking sector buffers and strengthened supervisory oversight welcomed.
- Still-sizable links between banks and the sovereign noted.
- Close attention needed for banks with smaller liquidity cushions, sizable exposure to commercial real estate, and weaker business models.
Key Statistics (Table 1: Italy: Summary of Economic Indicators, 2019-24)
- Real GDP: 2019: 0.5; 2020: -9.0; 2021: 7.0; 2022: 3.7; 2023: 1.1; 2024: 0.9
- Real domestic demand: 2019: -0.2; 2020: -8.4; 2021: 7.2; 2022: 4.3; 2023: 1.0
- Final domestic demand: 2019: 0.2; 2020: -8.0; 2021: 6.6; 2022: 4.7; 2023: 1.3; 2024: 0.8
- Private consumption: 2019: -10.4; 2020: 4.6; 2021: 1.2
- Public consumption: 2019: -0.6; 2020: 0.0; 2021: 1.5; 2022: -1.1; 2023: -2.2
- Gross fixed capital formation: 2019: -7.9; 2020: 18.6; 2021: 9.4; 2022: 3.1; 2023: 2.2
- Stock building 1/: 2019: -0.5; 2020: -0.4; 2021: -0.3; 2022: 0.1
- Net exports 1/: 2019: 0.7; 2020: -0.8; 2021: -0.1; 2022:
- Exports of goods and services: 2019: 1.6; 2020: -13.5; 2021: 14.0; 2022: 2.8
- Imports of goods and services: 2019: -0.7; 2020: -12.1; 2021: 15.2; 2022: 11.8; 2023: 1.7; 2024: 3.2
- Savings 2/: 2019: 21.6; 2020: 23.7; 2021: 20.5; 2022: 22.2; 2023: 23.9
- Investment 2/: 2019: 18.2; 2020: 17.7; 2021: 20.7; 2022: 21.8; 2023: 21.5; 2024: 22.9
- Potential GDP: 2019: 0.4; 2020: -4.0; 2021: 4.1
- Output gap (percent of potential): 2019: -1.8; 2020: -7.0; 2021: -4.3
- Employment: 2019: -3.1; 2020: 2.4
- Unemployment rate (percent): 2019: 9.9; 2020: 9.3; 2021: 9.5; 2022: 8.1; 2023: 8.0
- GDP deflator: 2019: 0.6; 2020: 3.0; 2021: 6.2; 2022: 3.6
- Consumer prices: 2019: 1.9; 2020: 8.7; 2021: 5.2; 2022: 2.5
- Consumer prices (core): 2019: 4.0; 2020: 4.8
- Hourly compensation 3/: 2019: 2.9; 2020: 5.1; 2021: 4.5
- Productivity 3/: 2019: 1.4; 2020: -0.9
- Unit labor costs 3/: 2019: 4.4; 2020: 1.8
- General government net lending/borrowing 2/: 2019: -1.5; 2020: -9.7; 2021: -4.5; 2022: -3.4
- General government primary balance 2/ 4/: 2019: -6.2; 2020: -5.5; 2021: -3.6; 2022:
- Structural overall balance (percent of potential GDP): 2019: -5.4; 2020: -4.6; 2021: -1.7; 2022: -2.1; 2023: -2.9
- Structural primary balance (percent of potential GDP) 4/: 2019: 2.7; 2020: -1.2
- General government gross debt 2/: 2019: 134.1; 2020: 154.9; 2021: 149.9; 2022: 144.4; 2023: 140.5; 2024: 138.8
- Nominal effective rate: CPI based (2000=100): 2019: 103.0; 2020: 105.2; 2021: 106.4; 2022: 104.6
- Financial sector: 2019: -2.4; 2020: -2.0; 2021: -1.0
- Current account balance: 2019: 3.3; 2020: 3.9
- Trade balance: 2019: 3.4; 2020: 2.3; 2021: -1.4
Sources: National Authorities; and IMF staff estimates.
IMF Communications Department — Press Release No. 23/273, July 26, 2023.
