IMF Executive Board Concludes 2023 Article IV Consultation with Italy

July 26, 2023

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Italy.

The Italian economy has weathered well the effects of Russia’s war in Ukraine, growing by 3.7 percent in 2022. Private consumption rose robustly on recovery in employment, buoyant tourism, and extensive fiscal support of real purchasing power. Growth in services and construction offset weakness in manufacturing, especially in energy-intensive industries affected by high energy prices. Consumer prices increased, largely on surging energy prices, financial conditions tightened considerably and yields on Italian government bonds have risen as monetary policy tightened. The labor market performed strongly, nominal wages have risen but real wages fell. Banks’ capital and liquidity buffers remained broadly stable at comfortable levels and NPLs declined further, but risks remain elevated amid the uncertain outlook for the economy and the future path of monetary policy. Extensive policy support and rising interest costs kept fiscal deficits very high. The public debt ratio declined but remains very high. A declining working-age population could lower growth over the longer term.

Growth is expected to enter a slower phase and downside risks dominate the outlook. Growth is forecast to moderate to 1.1 percent in 2023 and to 0.9 percent in 2024, and then to pick up temporarily to 1.1 percent in 2025. Headline inflation is projected to decline steeply to 5.2 percent in 2023 and to 2.5 percent in 2024, driven by lower energy and food prices. A sharper tightening of monetary policy could transmit asymmetrically to Italy and further raise borrowing costs while renewed global financial stress could reduce funding availability, causing public and private spending to retrench and reviving concerns about sovereign-bank-corporate linkages. Policies that slow public debt reduction or prolonged delays in receiving NextGenerationEU (NGEU) disbursements could raise financing concerns. Growth could be negatively affected by renewed jumps in energy prices, fragmentation of foreign trade and investment or a generalized decline in external demand.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the Italian economy’s resilience to sequential adverse shocks, noting the strong recovery in output and employment. However, they noted that the fiscal deficit has widened sharply, the public debt ratio is very high, and core inflation remains elevated. A declining working-age population could lower economic growth over the longer term. With risks mainly to the downside, Directors highlighted the need to focus on fiscal adjustment and ambitious structural reforms to raise productivity and potential growth, and enhance energy security and meet the authorities’ climate goals.

Directors underscored the importance of decisively lowering the public debt ratio and welcomed the authorities’ commitment in this regard. They broadly supported frontloading fiscal adjustment by saving part of revenue windfalls and spending more efficiently, although a number of Directors considered the authorities’ planned near-term adjustment to be adequate. Many Directors emphasized that Italy’s overall risk of sovereign stress is moderate. Over the medium to long term, a strong primary surplus is needed to sustain steady, decisive debt reduction. Directors agreed that consolidation will need to be underpinned by well-defined and efficient measures, including a base-broadening tax reform, continued action on tax compliance, and pension reform. Growing primary current spending below the pace of nominal GDP would carve out room for public investment. Prudently managing publicly-guaranteed loans while strictly limiting new guarantees will also be critical.

Directors welcomed the improvement in banking sector buffers and the strengthened supervisory oversight in recent years but noted the still-sizable links between banks and the sovereign. Preserving financial stability in the context of tightening monetary policy and rising funding costs is a priority. Close attention will be necessary for banks with smaller liquidity cushions, sizable exposure to commercial real estate, and weaker business models. Maintaining adequate headroom on capital and liquidity on a forward-looking basis will also be important. Directors noted that banks’ recourse to public-sector backstops should generally be avoided. Efforts to strengthen the AML/CFT regime should continue.

Directors underscored the need to raise potential growth and address future challenges. They recommended implementing comprehensive and ambitious reforms and resolving bottlenecks to critical investments while also promoting competition and transparency. Boosting productivity and labor force participation and closing the gender employment gap, including through improved education and better tax incentives, would help counter the effects of a contracting working-age population. Accelerating clean electricity capacity would strengthen energy security and support climate targets. Directors encouraged the timely and effective implementation of the National Recovery and Resilience Plan supported by NextGenerationEU (NGEU) funding.

It is expected that the next Article IV Consultation with Italy will be held on the standard 12-month cycle.


Table 1. Italy: Summary of Economic Indicators, 2019-24

(Annual percentage change, unless noted otherwise)

7/25/2023 13:06

Projections

2019

2020

2021

2022

2023

2024

Real GDP

0.5

-9.0

7.0

3.7

1.1

0.9

Real domestic demand

-0.2

-8.4

7.2

4.3

0.9

1.0

Final domestic demand

0.2

-8.0

6.6

4.7

1.3

0.8

Private consumption

0.2

-10.4

4.7

4.6

1.3

1.2

Public consumption

-0.6

0.0

1.5

0.0

-1.1

-2.2

Gross fixed capital formation

1.2

-7.9

18.6

9.4

3.1

2.2

Stock building 1/

-0.5

-0.5

0.5

-0.4

-0.3

0.1

Net exports 1/

0.7

-0.8

0.0

-0.5

0.2

-0.1

Exports of goods and services

1.6

-13.5

14.0

9.4

2.2

2.8

Imports of goods and services

-0.7

-12.1

15.2

11.8

1.7

3.2

Savings 2/

21.6

21.6

23.7

20.5

22.2

23.9

Investment 2/

18.2

17.7

20.7

21.8

21.5

22.9

Resource utilization

Potential GDP

0.4

-4.0

4.1

0.0

0.7

0.7

Output gap (percent of potential)

-1.8

-7.0

-4.3

-0.8

-0.4

-0.3

Employment

0.7

-3.1

0.8

2.4

0.8

0.1

Unemployment rate (percent)

9.9

9.3

9.5

8.1

8.0

8.1

Prices

GDP deflator

0.9

1.6

0.6

3.0

6.2

3.6

Consumer prices

0.6

-0.1

1.9

8.7

5.2

2.5

Consumer prices (core)

0.6

0.5

0.8

4.0

4.8

3.2

Hourly compensation 3/

2.9

5.1

-1.8

3.2

4.5

2.5

Productivity 3/

0.5

0.8

1.4

-0.9

0.2

0.7

Unit labor costs 3/

2.4

4.4

-3.1

4.1

4.3

1.8

Fiscal indicators

General government net lending/borrowing 2/

-1.5

-9.7

-9.0

-8.0

-4.5

-3.4

General government primary balance 2/ 4/

1.9

-6.2

-5.5

-3.6

-0.5

0.8

Structural overall balance (percent of potential GDP)

-0.6

-5.4

-4.6

-1.7

-2.1

-2.9

Structural primary balance (percent of potential GDP) 4/

2.7

-2.2

-1.2

2.7

1.9

1.2

General government gross debt 2/

134.1

154.9

149.9

144.4

140.5

138.8

Exchange rate regime

0.9

0.9

0.8

0.9

…

…

Nominal effective rate: CPI based (2000=100)

103.0

105.2

106.4

104.6

…

…

Financial sector

-2.4

2.8

1.0

0.1

-2.0

-1.0

External sector 2/

Current account balance

3.3

3.9

3.1

-1.2

0.7

0.9

Trade balance

3.4

3.6

2.3

-1.4

0.5

0.7

Capital account balance

-0.1

0.1

0.1

0.5

0.8

0.8

Sources: National Authorities; and IMF staff estimates.

1/ Contribution to growth.

2/ Percent of GDP.

3/ In industry (including construction).

4/ Primary revenue minus primary expenditure.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .

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