▪ The global background and the Italian macroeconomic snapshot: The rising risk of stagflation is resulting in a slashing of growth estimates and an increase in revisions to inflation simultaneously. The growth outlook for Italy has been revised down on tighter financing conditions and monetary policy normalization, coupled with the energy crisis in Europe and global value chain bottlenecks. Thus, GDP growth in Italy has been revised downwards to 2.6% for 2022, slowing to 1% for 2023, while the Eurozone is expected to grow by 2.4% in 2022 but slow to 1.3% in 2023. Inflation projections have been revised up on a higher oil price scenario and stronger and broader-based realised inflation: we forecast inflation average 7.3% and 7.5% in Italy and the Eurozone in 2022, respectively, while we expect moderations for 2023, averaging 3.9% in Italy and 4.1% in the Eurozone.
▪ Italy’s public finances and the trajectory of Italian debt: The debt/GDP ratio rose to 150% in 2021, impacted by the shock of the Covid-19 pandemic. But we observe a somewhat stronger decline in the ratio for any given level of rates and fiscal discipline vs the past.] However, Italy continues to be exposed to sustained and persistent shifts in the yield curve, and on a mid-term horizon, when the bulk of NGEU spending will be over, improvement in potential growth will be the key to debt sustainability.
▪ Investment implications: BTP technicals look supportive, together with more attractive relative value in terms of carry, but short-term volatility will persist as the market focus will remain on the next announcement from the ECB and to what extent the new backstop will be perceived as effective.
Macroeconomic scenario and economic perspectives
Amid the cost of living crisis, ongoing since last autumn, Italy saw unexpected resilience in Q1 as the initial GDP growth estimate of -0.2% was revised up to 0.1% QoQ. However, there was no good news on domestic demand: a 0.8% QoQ contraction in household consumption does not bode well for the future, as consumer confidence declined further during Q2. Thanks to the fiscal incentives and likely NGEU –related optimism, the rise in investment was substantial so far, with a 3.9% QoQ jump, driven by a surge in construction of buildings (+5.4% QoQ) and an increase in machinery and equipment investments (+4.3% QoQ). Gross fixed capital formation contributed a whopping 0.8% to quarterly GDP growth while final consumption expenditure subtracted more than 0.4%. Inventory changes were flat. Net exports made a negative contribution as imports (4.3% QoQ) were stronger than exports (3.5% QoQ).
Looking ahead, the cost-of-living crisis will continue to squeeze real disposable income in the coming quarters and we expect consumption to remain weak in the middle of 2022. Conversely, it is encouraging to see that that the expansion in investment activity appears to be continuing. We expect to see a contraction in Q2 and possibly another weak reading for the autumn/winter season, provided there is no energy rationing. The services sector should remain well supported in Q3, thanks to the re-opening effect and tourism-related inflows
The “strong” annual expected GDP growth for 2022 will simply be an optic effect, though, thanks to the 2021 carry-over, while the GDP dynamic will be flattish in terms of levels.