Press Release No. 24/286

IMF Executive Board Concludes 2024 Article IV Consultation with Italy

July 23, 2024

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

Italy’s economy has recovered well from the COVID and energy price shocks. Activity expanded by 0.9 percent in 2023 and, by the first quarter of 2024, real GDP had exceeded the pre-global financial crisis level. The recovery has been supported by private consumption as well as investment, which was boosted by tax credits for home renovations and purchases of capital equipment. Headline inflation has declined steeply, led by the drop in energy prices, with core inflation also moderating. Employment rose alongside real activity, accentuating skill shortages. Financial conditions have eased but remain tight by historical standards. Strong nominal GDP growth and delayed recording of already-incurred tax credit liabilities allowed the public debt ratio to decline despite fiscal deficits much larger than pre-COVID. The combination of low fertility and low female labor force participation foreshadows accelerated population and work force declines.

Growth is forecast to average around ¾ percent in 2024-26 as one large spending program is succeeded by another, with disinflation continuing. Continued ramp up in investment under the EU-financed National Recovery and Resilience Plan (NRRP) is expected to broadly offset the drop in residential investment. Inflation is projected to undershoot the 2 percent target in 2024, but to return to target thereafter. While positive growth surprises are possible if stronger fiscal performance were to crowd in higher private investment, growth could be adversely affected by an intensification of regional conflicts, sharp slowdowns in major trading partners, deepening geoeconomic fragmentation, significantly higher-than-expected interest rates that could revive concerns about sovereign-bank-corporate linkages. Incomplete NRRP spending and reform implementation would also weaken growth, while still-large fiscal deficits could erode investor confidence, further weakening public finances.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed the economy’s resilience and strong cyclical recovery from the COVID and energy price shocks—with output and employment increasing to well above pre pandemic levels—as well as the accompanying employment gains and orderly disinflation. However, while growth is projected to remain stable over the coming years, Directors agreed that the economy’s capacity to sustain growth is affected by weak productivity, the ongoing demographic decline, as well as the difficulties associated with the climate, digital and geopolitical transitions.

Directors noted that despite the recovery, fiscal deficits are much larger than pre COVID, and with rising latent spending pressures, public debt and financing needs would remain very high. Most Directors therefore saw a pressing need for decisive, frontloaded fiscal adjustment, and viewed the economy’s current favorable cyclical position as an opportunity to deliver a primary surplus of 3 percent of GDP by rescinding measures to cushion past shocks, curtailing inefficient tax and spending policies, and saving fiscal overperformance. However, a number of Directors instead questioned whether the pace of adjustment suggested by staff adequately weighs the need to preserve room for growth enhancing investments and reforms. Directors called for a base broadening and revenue enhancing tax reform, strengthened oversight and control of tax credits, streamlined pension spending, and gradual decrease of publicly guaranteed loans to their pre pandemic level.

Directors praised the economy’s smooth absorption of tighter financial conditions and welcomed the requirement for banks to preserve part of their existing capital headroom to cope with possible future shocks. To further reinforce banking sector stability, loan classification should be sufficiently forward looking, funding structures should be diversified and include adequate stable sources, and weaker small banks should continue to be closely monitored. Frameworks for debt workouts should be strengthened.

Directors underscored the need to raise productivity and boost the supply of skilled labor. Full and timely implementation of the National Recovery and Resilience Plan remains a priority, to be followed by a successor plan to facilitate the green and digital transitions and focusing on critical public infrastructure, education reform, and improving the business climate. Directors also recommended deepening capital markets and cautioned that industrial policy be used selectively to correct market failures. Improving the compatibility of work and family life was seen as supporting labor supply in the near term and at the longer horizon.

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

[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.