Five challenges facing the Italian economy in 2024

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Italy’s finances remain in a precarious position, and fiscal issues are likely to remain one of the country’s most important issues this year. Italy needs more workers in a variety of industries, but efforts to bring in more workers from outside Italy are likely to be curtailed by the growing far-right movement.

Slowing GDP growth rate

In its latest forecast, the Bank of Italy expects gross domestic product (GDP) to slow further in 2024, from 0.7% in 2023 to 0.6%. Inflation, which has a direct and significant impact on consumers, has slowed down slightly, but the situation remains severe. It is expected to increase to above the 2% threshold again. Figures released in December showed core inflation, which excludes energy and food, remained at 3.1%. Measures introduced to limit the impact of rising energy prices (such as a 22% value-added tax on gas) are being lifted, thereby leading to a further spike in inflation.

Investment, especially in the construction sector, will decline sharply in 2023 and is expected to fall by a further 8.6% this year, combined with declines in employment, permits and residence permits, according to Global Data. Analyst Fitch Solutions expects consumer spending and investment to slow compared to the past two years. The GDP growth rate in 2024 is expected to slow to 0.3%, lower than the expected 0.8%.

soft labor market

Another feature of the economic slowdown is that it leads to a tightening of financial conditions. Fitch Solutions believes that if the European Central Bank (ECB) keeps interest rates unchanged at 4% until October, it could have a negative impact on business and manufacturing activity.

It is important to note that 75.1% of the loans taken out by households and businesses in 2023 were so-called variable rate loans, where the repayment interest level of the loan was variable rather than fixed. This means that if interest rates rise, those with variable rate loans will have to pay back more interest. Rising borrowing costs for businesses and individuals means both groups are likely to have less money available for other things.

Another possible effect could be a softening of the labor market. The rating agency expects Italy’s unemployment rate to reach 8.5% by the end of 2024, compared to 7.6% in the second quarter of 2023.

Consumers expect more pain

Lower employment levels and slower wage growth are expected to put further pressure on consumers and their spending. For example, if you look at the mortgage interest rate in August 2023, it will be 4.3%, up from 3% previously. This inevitably has a negative impact on consumers’ disposable income.

climate

Catastrophic floods in 2023 appeared to be becoming more common in some parts of Italy as climate disasters become more prevalent in the country. If this trend continues in 2024, it looks like climate change in Italy could lead to a series of extreme weather events that pose a danger to the socio-economic landscape.

Given that the second year of an El Niño event is usually warmer than the first, 2024 could bring climate change challenges to Italy in the key sectors of health, energy and food.

Italy and the G7 leadership challenge

This year began with Italy taking over the G7 presidency from Japan. This could be one of the main challenges for Italy, as the transfer of power approaches a critical period. The global scenario looks bleak as national challenges persist, including slowing GDP growth, the migration crisis, and a weak labor market. The war between Russia and Ukraine continues, while the ongoing Israel-Gaza crisis is further exacerbated by the Red Sea standoff.