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Wider Italian Debt Dynamics Remain Concerning (2/2)

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Recent trends in the interest rate-growth differential “(r-g)” remain somewhat concerning. The sharp fall in Q1 nominal GDP growth (-6.6% Q/Q) meant that the 4Q rolling sum of (r-g) rose to -2.1pp, its highest since June 2021.

  • If (r-g) is positive and a country runs fiscal deficits, it puts the government debt/GDP ratio on a potentially unstable and explosive path higher.
  • The Italian debt/GDP ratio rose a touch to 137.7% in Q1 (vs 137.3% prior), and the EC expects this ratio to rise to 141.7% by 2025.
  • The EC notes that this increase “mainly reflects a less favourable interest growth-rate differential and a debt-increasing stock-flow adjustment related to the delayed cash impact of government-supported housing renovation”. The latter point refers to the controversial “Superbonus” scheme.

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Recent trends in the interest rate-growth differential “(r-g)” remain somewhat concerning. The sharp fall in Q1 nominal GDP growth (-6.6% Q/Q) meant that the 4Q rolling sum of (r-g) rose to -2.1pp, its highest since June 2021.

  • If (r-g) is positive and a country runs fiscal deficits, it puts the government debt/GDP ratio on a potentially unstable and explosive path higher.
  • The Italian debt/GDP ratio rose a touch to 137.7% in Q1 (vs 137.3% prior), and the EC expects this ratio to rise to 141.7% by 2025.
  • The EC notes that this increase “mainly reflects a less favourable interest growth-rate differential and a debt-increasing stock-flow adjustment related to the delayed cash impact of government-supported housing renovation”. The latter point refers to the controversial “Superbonus” scheme.