Italy’s economic outlook worsens on inflation

Behind the counter of F.lli Gondola, a café and pastry shop in Frattamaggiore, owner Salvatore Gondola keeps a photo of Italian footballer Lorenzo Insigne.

Insigne, who grew up in the small town north of Naples, and his Azzurri team-mates won the hearts of the nation at the UEFA European Championship against England last year – a fitting symbol for a country rebound after a devastating pandemic hit.

With Prime Minister Mario Draghi’s backing, Italy starts 2022 with a year of strong growth and structural reforms assured leadership and the infusion of EU funds. Funded by €191 billion of the EU’s €750 billion COVID-19 recovery plan, a once-in-a-lifetime effort to address its chronic weakness and improve its long-term growth trajectory is underway.

On and off the field, the glory faded quickly. The Azzurri missed out on qualifying for the World Cup after a crushing defeat to North Macedonia and the economic outlook has become so bleak that a recession is likely this year.

Coffee bar owner Salvatore Gondola

Coffee bar owner Salvatore Gondola, sales fall and costs rise during 2022 © Amy Kazmin/FT

Soaring food and energy prices undercut any momentum built in 2021, which is squeezing household incomes and hitting vulnerable small businesses. “Today was hard, really hard,” said the gondola. “It’s like during Covid. The only difference is that this time there is no mask.”

Italy is not the only European economy facing difficult times. Brussels recently cut its forecast for EU GDP growth this year to 2.7% from 4% in February. Inflation rates are higher in the eastern economies, Germany and the Netherlands.

But Italy is heavily dependent on Russia for energy, making it vulnerable to the conflict in Ukraine. “Some countries are at greater risk than others,” said Lorenzo Codogno, the former director general of Italy’s finance ministry. “Among the major countries, Italy’s exposure was similar to Germany, and possibly even more high energy costs. . . it’s a huge trade terms shock for consumers, which means the whole country gets poorer. The deal with Algeria to supply gas from North Africa will take years to pay off.

Recession — and what to expect from the economy rate hike The European Central Bank – from July – is rekindling concerns about Italy’s long-term fiscal health. Italy’s debt-to-GDP ratio is second only to Greece’s and has the highest government deficit of any major euro zone economy, putting its status in jeopardy.

The market has become more pessimistic about its prospects. The spread between Italy’s 10-year bond yield and Germany, seen as a barometer of euro zone political and economic risk, has climbed to 2 percentage points in recent weeks, a risky investor sell-off since the early days of the pandemic. The highest level of European government debt since bonds. “It’s going to be a very delicate environment,” Codogno said.

Italy is on the road to fiscal consolidation. The target budget deficit for this year is expected to be 5.6%, down from 7.2% last year. But economists warned that a sharp slowdown in growth would raise doubts about the deficit.

“If GDP is going to weaken significantly, the dynamics don’t look rosy,” said Lucrezia Reichlin, professor of economics at the London Business School. “The market is getting pretty pessimistic now and a possible recession in 2022 is what many expect. “

The influx of EU investment funds is a positive factor. Italians have also accumulated higher-than-usual savings during the lockdown, which can now be withdrawn to sustain consumption. But according to Codogno, the impact will subside and the impact on disposable income in the coming quarters will be “huge”.

Line graph of the Consumer Confidence Index showing the rapid decline in Italian consumer confidence

Residents of Frattamaggiore are already feeling the pinch.

Sosso Fardello, 74, is a retired public transport worker who receives a fixed monthly pension of 1,500 euros. Energy bills soar“We have to think about everything we buy, and what we need to live,” he said.

Draghi’s government to levy 25% this month windfall tax Using excess profits from energy companies to raise funds to cushion millions of economically vulnerable households, including pensioners, through energy subsidies and a one-time €200 cash payment.

Raffaele Rega, a 74-year-old pensioner who works at a shoemaker, said the measures were not enough. “Our pension is just enough to survive and pay for food.”

Gondola, who runs the pastry shop with his brother, brother-in-law and nephew, said he was trying to make the business generate enough surplus to support four families. Energy bills that used to average 1,200 euros per month are now 1,600 euros; the price of the small paper trays they use to hold their pastries has recently doubled; and sales have fallen by 30 percent since January.

Gondola had no choice but to pass on these rising costs to his customers, raising the price of coffee from 80 cents to 1.20 euros and a kilo of fruit tarts from 13 to 15 euros. He stopped his 1.5kg pie because his customers could no longer afford it. “We’re all trying to squeeze small pieces out of a smaller cake,” Gondola said.

Additional reporting by Martin Arnold in Frankfurt

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