Italy’s economic outlook has been strained as inflation soars

Behind the counter of F.lli Gondola, Frattamaggiore’s coffee shop, café and pastry shop, owner Salvatore Gondola keeps a photo of Italian soccer player Lorenzo Insigne.

Insigne, who grew up in this small town north of Naples, and his fellow Azzurri players won the hearts of the nation when they won the European Football Championship against England last year – a fitting symbol of a country. bouncing back after a devastating pandemic.

Italy has started 2022 as it prepares for a year of booming growth and structural reforms, with the support of Prime Minister Mario Draghi sure driving Infusion of European Union funds. There have been once-in-a-generation efforts to tackle its chronic weakness and lift its long-term growth trajectory, funded by €191 billion from the EU’s €750 billion Covid recovery plan.

On and off the field, the glory quickly faded. The Azzurri missed out on qualifying for the World Cup after an embarrassing defeat to North Macedonia and the economic outlook has turned so bleak that there is the prospect of a recession this year.

Cafe owner Salvatore Gondola

Salvatore Gondola, owner of the café, which has seen sales decline and costs rise over the course of 2022 © Amy Kazmin/FT

Any momentum that was built up in 2021 has been waned by rising food and energy prices, compressing household incomes and hitting fragile small businesses. “Today it’s hard, really hard,” said the gondola. “It is like during Covid. The only difference is that this time, without a mask.”

Italy is hardly the only European economy facing hard times. Brussels recently cut its forecast for EU GDP growth this year to 2.7 percent, down from an estimate of 4 percent in February. Inflation is higher in the economies of the East, in Germany and the Netherlands.

But Italy depends heavily on Russia for its energy, leaving it vulnerable to the conflict in Ukraine. “Some countries are more exposed than others,” said Lorenzo Codogno, former director general of the Italian Treasury. “Within the big countries, Italy is exposed as GermanyAnd, perhaps even more so, to higher energy costs. . . It is a huge shock to the terms of trade for consumers, which means that the whole country is getting poorer.” The agreement signed with Algeria to supply gas from North Africa will take years to bear fruit.

Economic downturn – the outlook rate increases From the European Central Bank from July – working to revive concerns about the health of Italy’s long-term finances. With the second-highest debt-to-GDP ratio after Greece and the highest government deficit of any major eurozone economy, Italy’s position is precarious.

Markets are getting bleaker about their prospects. The spread between Italy’s 10-year bond yield and Germany’s, which is a gauge of political and economic risk in the euro zone, has risen to two percentage points in recent weeks, the widest since the early stages of the pandemic when investors dumped risk. European government debt. “It will become a very sensitive environment,” Codogno said.

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

“If GDP is going to weaken significantly, the dynamism will not look pretty,” said Lucrezia Richlin, professor of economics at London Business School. “The market is now very pessimistic and a possible recession in 2022 is something that many people expect.”

The influx of EU investment funds is positive. Italians have also amassed higher-than-normal savings during the lockdowns, which can now be drawn down to maintain consumption. But the effect will wear off and the hit to disposable income in the coming quarters will be, according to Codogno, “enormous.”

The line graph of the Consumer Confidence Index shows that Italian consumers' confidence is declining rapidly

The residents of Frattamaggiore are already feeling the pinch.

Suso Vardello, 74, a retired public transport worker living on a fixed monthly pension of €1,500, cut off nearly all discretionary spending after receiving a Energy bills rose. “We have to think about everything we buy, and what is necessary to live,” he said.

This month, the Draghi government imposed 25 percent unexpected tax On the excess profits of energy companies to generate funds to support millions of financially vulnerable families, including retirees, through energy subsidies and a one-time cash payment of 200 euros.

Pension Rafael Riga, 74, who worked as a shoemaker, said such measures were not enough. “Our pension is just enough to survive and pay for food.”

Gondola – who runs his own sweet shop with his brother, son-in-law and nephew – said he was struggling to get the company to generate enough surplus to support four families. Monthly energy bills that averaged 1,200 euros are now 1,600 euros; The price of the small paper trays on which they serve pastries has recently doubled in price; Sales are down 30 percent since January.

The gondola had no choice but to pass on these high costs to its customers, raising the price of coffee from 80 cents to 1.20 euros, and a 1 kg fruit tart from 13 euros to 15 euros. He stopped producing larger 1.5 kg pies, because his customers could no longer afford them. “We all try to squeeze little bits out of a smaller cake,” Gondola said.

Additional reporting by Martin Arnold in Frankfurt

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