Though economic activity and employment in Italy grew strongly last year on the authorities’ skillful management of gas supplies and the welfare support provided in response to the energy price shock, growth is forecast to shift to a lower gear from this year onwards, while core inflation is expected to remain sticky, and high interest rates will keep financial sector risks elevated, the 2023 Article IV Mission to the country by the International Monetary Fund (IMF) concluded recently.

Addressing the multiple challenges of population aging, climate change, energy security, and global fragmentation requires productivity-enhancing reforms and investing in skills and in green and digital infrastructure, it noted.

Escalating geopolitical tensions or extreme weather events could create supply disruptions. On the upside, growth could prove more resilient, the Mission noted.

Italian banks’ capital and liquidity buffers remained broadly stable at comfortable levels over the past year and non-performing loans declined further.

However, credit volumes are expected to decline and NPLs are likely to rise as borrowers’ repayment capacity is crimped by rising interest rates and slower economic growth, IMF observed.

Funding costs are expected to increase, especially for those banks where excess reserves are smaller than maturing targeted longer-term refinancing operations (TLTRO) borrowing. Greater competition for retail savings with the government could raise banks’ funding cost, IMF said.

Ambitious, productivity-enhancing structural reforms are a priority to offset the drag on output from the shrinking workforce due to Italy’s rapidly aging population. This requires measures to reduce unemployment and inactivity traps, decrease informality, and avoid propping up declining firms, IMF said.

While Italy met its energy needs during the winter 2022-23, it should prepare for adverse scenarios in the coming winter, including a complete shut-off of Russian gas or further disruptions to hydro-generated electricity, the IMF Mission said.

Full return to market-based energy pricing would encourage further efficiency gains and conservation and a faster shift to renewable energy, it added.

Fibre2Fashion News Desk (DS)

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