Long-lasting challenges for the new government

Italy recovered solidly from the pandemic, with GDP expanding by +6.6% (vs. EZ GDP +5.2%), and output returned to pre-pandemic levels in Q1 2022. However, growth remains challenged by cyclical headwinds and while unemployment is declining, it remains high compared to the Eurozone average (8.4% vs 6.8% in April 2022). In addition, the trade balance has not fully recovered to pre-crisis levels.

We see activity growing by +2.6% in 2022, thanks mainly to a strong carry-over (Q1 GDP revised 3.0pp up to +0.1% q/q). But given the “higher for longer” price pressure in the commodity and energy markets, we now expect inflation to average 6.8% this year, before normalizing in 2023 (to average 3.4%). Surging energy prices are the main driver of spiking inflation (8% y/y in June), but the passthrough to other prices has started to broaden; core inflation jumped to 3.8% y/y from 3.2% in May. Indeed, Italy is highly exposed to the energy crisis; gas represents 43% of the country’s energy supply (and Russia is Italy's largest gas supplier, with 40% of all imports in 2020). This has a significant impact on households’ purchasing power and saving rates, and limits manufacturing production.

To counteract the negative effects and support the economy, comprehensive fiscal support was implemented during both the pandemic and the energy crisis at the expense of diminishing policy space. So far, energy-related fiscal measures have amounted to some 1.5-2% of GDP.

The corporate sector has been one of the main beneficiaries of the comprehensive fiscal measures, with credit to non-financial corporation picking up during the crisis. Credit conditions and demand remained favorable compared to the historical standard. Households are taking a significant hit to real purchasing power but there seems to be greater willingness to maintain living standards by borrowing.

Business insolvencies quickly bounced back in H2 2020 after the re-opening of courts and remained at a pretty high level in H1 2021, leading to a noticeable rebound in annual terms in 2021 (+21% to 7,160 cases) despite a softer dynamic in the second part of the year, which proved to be broad-based in terms of sectors. 2022 started with a prolonged low monthly number in insolvencies, below 2021 and 2019 figures, but we expect a rebound in H2 2022 that would lead to a +6% increase for the full year, gaining traction in 2023 (+21%).

Italy’s recovery and resilience plan (RRP) envisages reforms to the justice system (to reduce the length of civil and criminal proceedings, improve the efficiency of the justice system and reduce the backlog of pending cases), public administration (to improve its effectiveness, cutting red tape and modernising public employment) and the business environment (to improve public procurement and local public services, reduce late payments and remove barriers to competition). It also allocates 37.5% of available funds to climate and energy objectives and outlines crucial reforms and investments to further the transition to a more sustainable, low-carbon and climate-resilient economy. 25% of the available resources is allocated to the digital transition. In particular, the RRP envisages significant investments in energy efficiency in residential and public buildings (EUR15bn), sustainable mobility (EUR34bn) and renewable energy, the circular economy and improving waste and water management (EUR11bn). It also sets out plans to invest of EUR13bn to digitalise businesses, EUR7bn for 5G and broadband and EUR6bn for the digitalization of public administration.