Italy Economic Forecast

A second release showed that the economy shrank more than initially reported in sequential terms in Q2, following a healthy expansion in the previous quarter. Fixed investment contracted due to the effects of higher interest rates, the phasing out of tax incentives in the construction sector and the delayed spending of EU recovery funds. Meanwhile, consumer spending flatlined, weighed on by sticky inflation and faltering savings. The economy should have recovered somewhat in Q3, although at a paltry pace. The manufacturing PMI rose in July and August, while in the same months, inflation fell, and consumer sentiment averaged higher than in Q2. That said, business confidence soared. Meanwhile, in early September, the government agreed to an ‘anti-inflation pact’ with producers to control prices on staple products and shield consumers from higher living costs until year-end.

Harmonized inflation fell to 5.5% in August (July: 6.3%), mainly due to softer increases in prices for non-regulated energy products, unprocessed food and transportation. Inflation should slow notably from current levels by end-2023 and into 2024, limited by cooling domestic demand and high interest rates. The euro’s strength and commodity prices are key factors to watch.