OECD Economic Outlook, Volume 2024 Issue 1

Italy

GDP is expected to grow by 0.7% in 2024 and 1.2% in 2025. High inflation over the past two years has eroded real incomes, financial conditions remain tight, and most of the exceptional fiscal support related to the COVID-19 and energy crises has been withdrawn, weighing on private consumption and investment. The projected pick-up in real wage growth and the increase in public investment related to New Generation EU (NGEU) funds will only partly offset these headwinds. Risks are broadly balanced. The main downside risk is that the scaling back of the so-called “Superbonus” building tax credit triggers a larger‑than‑expected contraction in housing investment. On the upside, a significant pick-up in public investment related to the National Recovery and Resilience Plan (NRRP) could boost growth.

Temporary tax cuts and higher NRRP spending broadly offset reduced fiscal support to households and businesses, resulting in a neutral fiscal stance in 2024 and a moderate fiscal tightening in 2025. This is broadly appropriate to put the public finances on a more prudent path, while avoiding a further weakening of activity amidst tight monetary policy and high borrowing costs. The speedy implementation of ongoing structural reforms in the areas of competition, civil justice and public administration and the ramp‑up of NRRP-related public investment will be key to sustain activity in the short term, and to raise potential growth in the medium term.

Activity remains weak

Real GDP grew by 0.2% in the fourth quarter of 2023, supported by strong housing investment before the scaling back of the “Superbonus” tax credit at the end of the year, whereas private consumption contracted. Recent high frequency indicators point to modest growth in the near term. While consumer confidence has improved over the past few months, manufacturing output, retail sales and business sentiment remain weak. Despite the slowdown in growth over 2023, the unemployment rate remains historically low and collectively negotiated wage growth has picked-up to around 3%, which should support household incomes and private consumption over the next quarters.

Declines in international energy prices over 2023 have been transmitted rapidly into consumer price inflation, which declined from more than 12% in November 2022 to 1.2% in March 2024. The stabilisation of energy prices over the past months suggests that inflation will mainly be driven by domestic factors in the near term. The tightening of global financial conditions has so far had limited negative spillovers on the health of the Italian banking sector, which has benefited from increased profitability due to higher net interest margins.

Italy: Economic growth and inflation indicators

1. Quarter-on-quarter annualized rates for the for the forecast period.

2. Harmonised consumer price index excluding food and energy.

Source: OECD Economic Outlook 115 database; and OECD calculations.

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Italy: Demand, output and prices

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Italy: Fiscal indicators

1. General government gross debt on a Maastricht basis for Italy; and general government financial liabilities for OECD.

Source: OECD Economic Outlook 115 database.

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High borrowing costs are weighing on activity

Borrowing costs for households and businesses have increased significantly in the wake of euro area monetary policy tightening, with interest rates on loans to non-financial corporations reaching about 5.3% in February. Lending standards remain tight, despite some easing over the past months, and lending growth remains negative. High interest rates have also raised debt servicing costs for the government, despite the recent decline of the risk premium on Italian government securities, with government interest payments expected to reach about 4% of GDP in 2024-25.

The stance of fiscal policy will be broadly neutral in 2024, with a modest tightening foreseen for 2025. Recent changes to Eurostat national accounting rules imply that accrual expenditure on building tax credits, including the “Superbonus”, will decline by about 3% of GDP in 2024, explaining a major part of the improvement in the fiscal balance. Despite the large improvement in the fiscal balance, fiscal policy will not tighten in 2024. The projected phase-out of energy policy support measures – which will amount to about 1% of GDP – will broadly be offset by lower income taxes due to the merging of the first and second-income tax brackets, the targeted reduction in social security contributions for low and middle‑income households and the expected ramp-up of spending related to Next Generation EU (NGEU) funds. In 2025, the income tax cuts introduced in 2024 and the targeted social security contribution cuts that were introduced in 2022 and expanded in 2023 are scheduled to expire under current legislation, implying a mild fiscal tightening and an improvement in the underlying primary fiscal balance of about ¾ per cent of GDP.

Inflation will remain low as growth picks up only modestly

Real GDP is projected to grow by 0.7% in 2024 and 1.2% in 2025. Tight financial conditions, the erosion of real incomes due to modest wage growth amid high inflation, and the phase-out of exceptional fiscal support related to the energy crisis will weigh on private consumption and investment. In 2024, these headwinds are offset only partly by temporary income and social security tax cuts and the expected pick‑up in public investment related to Next Generation EU funds. Core inflation is expected to come down gradually over 2024 on the back of increasing unemployment and moderate nominal wage growth. In 2025, the support to real household incomes from recovering real wages, the projected rise in public investment and the strengthening of exports due to recovering demand from Italy’s main trading partners will drive a mild pick-up in activity, despite the modest tightening of fiscal policy.

Risks to growth are broadly balanced. The main downside risk is that the scaling back of the “Superbonus” building tax credit triggers a larger-than-expected contraction in housing investment, which has been a key source of growth over 2021-23. On the upside, the acceleration in public investment related to the National Recovery and Resilience Plan (NRRP) could boost growth in 2024 and 2025. The full utilisation of NGEU funds implies that public spending needs to be ramped up from about 1% of GDP in 2023 to about 2½ per cent of GDP on average over 2024-26.

Putting the debt ratio on a more prudent path requires fiscal adjustment and structural reforms

The government deficit will narrow but remain above 3% until 2025, the public debt ratio is high and there are substantial spending pressures from investment needs and ageing costs. A large and sustained fiscal adjustment will be required over several years to meet future spending pressures, while putting the debt ratio on a more prudent path and complying with the new EU fiscal rules. The adjustment should include decisive action to tackle tax evasion, limiting the growth of pension spending and conducting ambitious spending reviews. The full implementation of the public investment and structural reform plans in the NRRP could durably lift Italy’s GDP, which would have the added benefit of putting further downward pressure on the debt-to-GDP ratio. Progress with structural reforms has been substantial, but spending of NGEU funds is behind the original schedule, which mainly reflects delays in the implementation of public investment projects. The revised NRRP that was approved by the European institutions in 2023 may help with speeding up implementation, including by focusing on projects for which implementation by 2026 remains viable. The priority should now be on strengthening the implementation capacity of the public administration, especially at the regional and municipal levels.