Bank of Italy: net drop in inflation to 1.3% in 2024, GDP confirmed at 0.6%

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Inflation will decrease sharply in 2024, to 1.3 percent (it was 1.9 in the latest forecast in December), mainly due to the effects of the fall in energy and intermediate product prices. “The disappearance of this factor and the increase in wages would lead to a slight rise in the following two years, to 1.7 percent”, we read in the document on macroeconomic projections for Italy in the three-year period 2024-2026 by Bank of Italy. While GDP growth is confirmed at 0.6 percent. Bank of Italy «draws attention to the fact that when comparing the Bank of Italy’s growth projections with those of the soon-to-be-published 2024 Economic and Financial Document (DEF), it is necessary to refer to the incorrect estimates for working days. According to these estimates, GDP would increase by 0.8 percent in 2024, 0.9 in 2025 and 1.3 in 2026.” Compared to the forecasts published in December, consumer inflation has been revised downwards, especially in 2024, mainly reflecting a faster than expected decline in the prices of energy goods, in particular gas.

For GDP, growth of 0.6% in 2024, 1% in 2025 and 1.2% in 2026

As regards GDP, Bankitalia estimates that product growth will remain limited during this year and will strengthen thereafter, thanks to the recovery in disposable income and foreign demand. On average for the year, gross domestic product would increase by 0.6 percent in 2024, 1.0 percent in 2025 and 1.2 percent in 2026. Compared to the projections published in December, GDP growth is almost unchanged: the positive effects of more favorable hypotheses on raw material prices and interest rates would be largely offset by the more pronounced slowdown in activity in the construction sector following the progressive remodulation of incentives for the energy requalification of properties.

Strong reduction in inflation in the current year

Consumer inflation, equal to 5.9 percent on average in 2023, would decrease sharply this year, to 1.3 percent, before rising again in the following two years, still remaining below 2 percent. The sharp reduction in inflation in the current year would mainly reflect the negative contribution of the prices of intermediate goods and energy, only partly offset by the acceleration of wages (expected to increase by around 3.5 percent per year on average in the three-year period 2024-26). Core inflation would fall to 2 percent on average this year and would fall further over the next two years. The risks for inflation, underlines Bank of Italy, are balanced. Upward pressure could arise if a worsening of international tensions induced new increases in the prices of raw materials and intermediate goods. On the other hand, the possibility of a deterioration in the international scenario and a more pronounced impact of monetary restriction could translate into a less favorable trend in demand with downward repercussions on wages, profit margins and consumer inflation.

The impact of the time restriction may be more pronounced than expected

As for the risks to growth, they are oriented towards the downside. More limited growth could occur if the lack of dynamism in world trade persists for longer, in connection with the uncertainty that characterizes the recovery of the Chinese economy and a possible worsening of international political tensions. The impact of the monetary restriction could also be more pronounced than expected and have a more intense impact on domestic demand. Finally, the progressive reduction of incentives for the redevelopment of homes could translate into a more marked correction in activity in the construction sector than expected.