MN INTERVIEW: Italy To Grow Into Q1 2023 - BOI's Signorini

The Italian economy is proving resilient to the war in Ukraine, supply bottlenecks and rising commodity prices and should continue to grow into the first quarter of 2023 after “reassuring” second quarter gross domestic product data, Bank of Italy Senior Deputy Governor Luigi Federico Signorini told MNI.

“Since 2021, the actual figures have tended to surprise positively when compared with analysts’ predictions, confirming the overall good performance of the Italian economy in these difficult times,” Signorini said in an emailed interview, pointing to data released last week confirming GDP growth at 1% in the second quarter versus the first.

Signorini said he was confident growth should continue into 2023, in line with recent European Commission and International Monetary Fund forecasts.

Nor should the eurozone slip into recession as the European Central Bank tightens policy, he said, noting that the latest Eurosystem projections, which incorporate market interest rates, foresee inflation returning to 2% by the end of 2024 without a fall in output.

“In those projections no recession is expected to be needed to achieve the Eurosystem’s inflation target,” he said, stressing that future monetary policy decisions will be data-dependent.

The ECB’s new Transmission Protection Instrument will be a “key tool” for ensuring a smooth delivery of monetary policy and to “avoid any unintended consequences of the policy normalisation”, he added. (See MNI SOURCES: Majority Sufficient For ECB's New TPI Tool)

EXCEPTIONAL UNCERTAINTY

Still uncertainty is “exceptionally high”. The Covid pandemic and a global slowdown are both risks, while an interruption to supplies of Russian gas would have a serious impact on the economy.

“Not just directly, through the temporarily reduced availability of fuel, but also indirectly through higher energy prices, a slowdown in global trade and a fall in business and consumer confidence,” he said, praising progress made by Prime Minister Mario Draghi in reducing the country’s dependence on Russian gas from 40% to 25% and European Commission contingency plans to mitigate the effects of any cut in supplies.

Reopening coal-fired power stations would be only a “short-run fix”, according to Signorini, who said there is no trade-off between environmental sustainability and energy security and that scarce public resources should be used to protect vulnerable households and help them transition to clean energy rather than to keep energy prices low.

“We would certainly have preferred a gradual, policy-oriented and carefully planned transition, with sufficient room for redistribution, to an exogenous, violent shock that leaves all of us poorer,” he said, though he noted that the recent rise in fossil fuel prices “was needed anyway to help achieve the climate-related transition.”

The green transition may affect relative prices more than overall inflation levels, Signorini said, adding that about 60% of Italy’s current inflation can be explained by direct and indirect effects of energy prices.

But authorities must ensure that current price increases do not “morph into a stubborn inflationary process” like in the 1970s.

“Society must be aware of the risk and avoid starting a price-wage spiral”, he said, adding that in Europe wage and non-fuel price increases are moderate “on the whole.”