(Bloomberg) — Italy must keep working to reinvigorate its growth potential to keep the public finances on track in the face of rising interest rates, the country’s central bank said.
(Bloomberg) — Italy must keep working to reinvigorate its growth potential to keep the public finances on track in the face of rising interest rates, the country’s central bank said.
Just hours after data showed the euro zone’s third-biggest economy returned to expansion with a surprisingly strong 0.5% surge from the prior three months — outpacing France and Germany — the Bank of Italy warned that underlying challenges haven’t gone away.
While officials observed that the deficit and debt are shrinking gradually, they said that Prime Minister Giorgia Meloni’s government can’t afford to stray from its goal of bringing the country’s mammoth borrowings under control.
“To consolidate this tendency, in light of the increase in interest rates it will be necessary to achieve a significant increase in growth potential and a structural increase in primary surplus,” the Bank of Italy said in its financial stability report published in Rome on Friday.
The latest government projections, ratified as part of a budget vote in Parliament on Friday, show debt falling close to 140% of output at the end of the forecast horizon.
With Moody’s Investors Service set to reveal in coming weeks whether Italy should retain an investment-grade rating, Meloni’s coalition has sought to reassure investors that it’s keen to keep public finances on an improving track. Officials backed that stance.
“Consolidation of these tendencies remains fundamental,” the Bank of Italy said.
The outcome for first-quarter economic growth was more than twice as much as economists anticipated. That might fuel the prospect that Italy can meet the government’s 1% growth target for 2023, which could additionally buy fiscal space to deliver aid to families and businesses.
Meloni is counting on the extra cash to finance tax breaks and help for lower income earners. She has faced opposition attacks for delays in meeting targets for European Union Recovery Fund cash payouts that are meant to fund investments aimed at boosting long term growth.
“These data are proof that our businesses, when allowed to unleash their full potential, know how to make a difference by making Italy strong and competitive, and by promoting the well-being of all Italians,” Meloni said on Friday after the release of the economic data.
JPMorgan economist Marco Protopapa gave a mixed response to the numbers.
“Strong Italian GDP growth through 2022 despite under-performance in the absorption of EU funds is a very positive signal of resilience,” he wrote in a report. “Despite very encouraging signals in its first six months, we think that the Italian government has to continue delivering to establish a track record and entrench credibility.”
The Bank of Italy report also noted that the country’s banks are weathering the current crisis well with improved profitability, and that the main vulnerabilities are linked to low growth and geopolitical uncertainty.
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