In its latest forecast, the Bank of Italy estimates the country’s economy will slow down further in 2024, with inflation expected to see a rise.
Italy’s financial matters are likely to remain one of the country’s most important issues this year, with its public finances still in a precarious condition. Italy needs more workers for various industries but a drive to increase workers from outside Italy is likely to be held back because of growing far-right influence.
Slowing GDP growth rate
In its latest forecast, the Bank of Italy estimates gross domestic product (GDP) will slow down further in 2024, down to 0.6% from 0.7% in 2023. Inflation, something that impacts consumers directly and significantly, has toned down a little but is expected to increase once again to above the 2% threshold. Core inflation, which excludes energy and food, still stands at 3.1%, as per the figures released in December. Measures put in place to curb the impact of rising energy prices – such as a 22% VAT rate on gas – are being lifted, thereby leading to another inflationary jump.
Investment, especially in the construction sector, declined sharply in 2023 and, according to GlobalData, there will be a further decline of 8.6% this year, in combination with falling employment, permits, and residential permits. Analysts Fitch Solutions forecasts a slowdown in consumer spending and investment on the previous two years. It expects GDP growth in 2024 to slow to 0.3%, below an estimate of 0.8%.
Soft labour market
Another function of a slowing economy is it leads to a tightening of financial conditions. Fitch Solutions believes the European Central Bank (ECB) will keep its rate at 4% until October which might adversely affect business/manufacturing activity.
It is important to note that 75.1% of loans taken out in 2023 by households and businesses were what is called a floating-rate loan, where the level of interest paid back on the loan is varied, not fixed. This means that, if interest rates rise, those with the floating-rate loans will have to pay back more interest on their loans. An increased cost of borrowing for business and individuals means both groups are likely to have less money to spend elsewhere.
Another possible impact could be a softening of labour markets. The rating agency expects unemployment to reach 8.5% by end of 2024 vs 7.6% in Q2 of 2023 in Italy.
Consumers to expect more pain
Falling employment levels and slowing wage growth is expected to put further pressure on consumers and their spending. For instance, if we look at the mortgage rate in August 2023, it stood at 4.3%, up from a previous 3%. This inevitably has an adverse effect on consumers’ disposable income.
Climate
With climate disasters becoming more prevalent in the country, the catastrophic floods of 2023 seemed to becoming more common in some parts of Italy. If the trend remains in 2024, it seems that the climate inconsistency of Italy may lead to the country experiencing a series of extreme weather events that will prove hazardous for its socio-economic landscape.
Considering that the second year of El Nino is usually warmer than the first, 2024 may bring climatic challenges for Italy in the major sectors of health, energy and food.
Italy and the G7 leadership challenge
The year began with the Italy taking over the presidency of G7 from Japan. This could turn out to be one of the main challenges for Italy as the transfer of power comes at a crucial time. With the ongoing national challenges such as slow GDP growth, an immigration crisis and a soft labour market, the global scenario seems bleak. The war between Russia and Ukraine continues while the ongoing Israel-Gaza crisis is further exacerbated by the Red Sea standoff.
