IMF Executive Board Concludes 2024 Article IV Consultation with Italy
IMF News, July 23, 2024
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- Published: July 23, 2024
Macro outlook and recent developments
- Activity expanded by 0.9 percent in 2023 and, by the first quarter of 2024, real GDP had exceeded the pre-global financial crisis level.
- Recovery supported by private consumption and investment, boosted by tax credits for home renovations and purchases of capital equipment.
- Headline inflation has declined steeply, led by the drop in energy prices, with core inflation also moderating.
- Employment rose alongside real activity, accentuating skill shortages.
- Financial conditions have eased but remain tight by historical standards.
- Strong nominal GDP growth and delayed recording of already-incurred tax credit liabilities allowed the public debt ratio to decline despite fiscal deficits much larger than pre-COVID.
- The combination of low fertility and low female labor force participation foreshadows accelerated population and work force declines.
Growth projections and risks
- Growth is forecast to average around ¾ percent in 2024-26 as one large spending program is succeeded by another, with disinflation continuing.
- Continued ramp up in investment under the EU-financed National Recovery and Resilience Plan (NRRP) is expected to broadly offset the drop in residential investment.
- Inflation is projected to undershoot the 2 percent target in 2024, but to return to target thereafter.
- Upside scenario: stronger fiscal performance could crowd in higher private investment, producing positive growth surprises.
- Downside risks:
- Intensification of regional conflicts.
- Sharp slowdowns in major trading partners.
- Deepening geoeconomic fragmentation.
- Significantly higher-than-expected interest rates that could revive concerns about sovereign-bank-corporate linkages.
- Incomplete NRRP spending and reform implementation.
- Still-large fiscal deficits eroding investor confidence and weakening public finances.
Executive Board assessment and priorities
- Directors welcomed the economy’s resilience and strong cyclical recovery from the COVID and energy price shocks—with output and employment increasing to well above pre pandemic levels—as well as employment gains and orderly disinflation.
- Constraints on sustained growth highlighted: weak productivity, ongoing demographic decline, and difficulties associated with the climate, digital and geopolitical transitions.
- Fiscal stance:
- Despite recovery, fiscal deficits are much larger than pre COVID; with rising latent spending pressures, public debt and financing needs would remain very high.
- Most Directors saw a pressing need for decisive, frontloaded fiscal adjustment, viewing the current cyclical position as an opportunity to deliver a primary surplus of 3 percent of GDP by rescinding measures to cushion past shocks, curtailing inefficient tax and spending policies, and saving fiscal overperformance.
- Several Directors questioned whether the pace of adjustment suggested by staff adequately preserves room for growth-enhancing investments and reforms.
- Directors called for a base broadening and revenue enhancing tax reform, strengthened oversight and control of tax credits, streamlined pension spending, and gradual decrease of publicly guaranteed loans to their pre pandemic level.
- Financial sector:
- Directors praised the economy’s smooth absorption of tighter financial conditions and welcomed the requirement for banks to preserve part of their existing capital headroom to cope with possible future shocks.
- Recommendations to reinforce banking sector stability: loan classification should be sufficiently forward looking; funding structures should be diversified and include adequate stable sources; weaker small banks should continue to be closely monitored.
- Frameworks for debt workouts should be strengthened.
- Structural reforms and labor supply:
- Need to raise productivity and boost the supply of skilled labor.
- Full and timely implementation of the National Recovery and Resilience Plan remains a priority, to be followed by a successor plan to facilitate the green and digital transitions and focusing on critical public infrastructure, education reform, and improving the business climate.
- Directors recommended deepening capital markets and cautioned that industrial policy be used selectively to correct market failures.
- Improving the compatibility of work and family life was seen as supporting labor supply in the near term and at the longer horizon.
Selected economic indicators, 2021-26 (Projections)
- Real Economy (change in percent)
- Real GDP: 8.3 (2021); 4.0 (2022); 0.9 (2023); 0.7 (2024); 0.6 (2025); 0.4 (2026)
- Final domestic demand: 7.4 (2021); 4.9 (2022); 2.0 (2023); 0.1 (2024); 0.8 (2025); 0.4 (2026)
- Exports of goods and services: 14.1 (2021); 10.2 (2022); 0.2 (2023); 1.3 (2024); 1.4 (2025); (no 2026 value provided)
- Imports of goods and services: 15.6 (2021); 12.9 (2022); -0.5 (2023); 0.0 (2024); 1.0 (2025); (no 2026 value provided)
- Consumer prices: 1.9 (2021); 8.7 (2022); 5.9 (2023); (no further annual values provided)
- Unemployment rate (percent): 9.5 (2021); 8.1 (2022); 7.7 (2023); 7.6 (2024); 7.8 (2025); 8.0 (2026)
- Public Finances
- General government net lending/borrowing 1/: -8.7 (2021); -8.6 (2022); -7.4 (2023); -4.6 (2024); -4.1 (2025); -3.7 (2026)
- Structural overall balance (percent of potential GDP): -8.3 (2021); -9.3 (2022); -8.1 (2023); -4.8 (2024); -4.7 (2025); -3.9 (2026)
- General government gross debt 1/: 147.1 (2021); 140.5 (2022); 137.3 (2023); 139.1 (2024); 140.6 (2025); 142.1 (2026)
- Balance of Payments (percent of GDP)
- Current account balance: 2.4 (2021); -1.6 (2022); 0.5 (2023)
- Trade balance: 2.1 (2021); 1.7 (2022); 1.6 (2023)
- Exchange Rate
- Exchange rate regime: Member of the EMU
- Nominal effective rate: CPI based (2000=100): 106.4 (2021); 104.6 (2022)
Press Release No. 24/286 — July 23, 2024 — IMF Communications Department
