Italy’s economic prospects sour as inflation bites

Behind the counter of F.lli Gondola, a espresso bar and pastry store in Frattamaggiore, proprietor Salvatore Gondola retains an image of Italian footballer Lorenzo Insigne.

Insigne, who grew up on this small city to the north of Naples, and his fellow Azzurri gamers gained the nation’s hearts once they clinched the European soccer championship towards England final yr — a becoming image for a rustic bouncing again after a devastating pandemic hit.

Italy started 2022 poised for a yr of buoyant progress and structural reforms, underpinned by Prime Minister Mario Draghi’s assured management and the infusion of EU funds. A once-in-a-generation effort to sort out its persistent weak spot and lift its long-term progress trajectory, funded by a €191bn chunk of the EU’s €750bn Covid restoration plan, was beneath method.

On and off the pitch, the glory has pale quick. The Azzurri missed out on qualification for the World Cup after an embarrassing defeat to North Macedonia and the financial outlook has turned so bleak that there’s the opportunity of a recession this yr.

Coffee bar owner Salvatore Gondola
Espresso bar proprietor Salvatore Gondola, who has seen gross sales decline and prices rise over the course of 2022 © Amy Kazmin/FT

Any momentum constructed up in 2021 has been dented by hovering meals and power costs, that are squeezing family incomes and battering fragile small companies. “Today it’s hard, really hard,” stated Gondola. “It’s like during Covid. The only difference is that this time, it’s without a mask.”

Italy is hardly the one European economic system dealing with exhausting instances. Brussels not too long ago pared again its forecast for GDP progress within the EU this yr to 2.7 per cent, down from a 4 per cent estimate in February. Inflation is greater in economies to the east, in Germany and within the Netherlands.

However Italy depends closely on Russia for its power, leaving it weak to the battle in Ukraine. “Some countries are more exposed than others,” stated Lorenzo Codogno, former director-general of the Italian treasury. “Within the major countries, Italy is as exposed as Germany, and probably even more, to high energy costs . . . It is a massive terms of trade shock to consumers, which means the whole country becomes poorer.” A deal signed with Algeria to offer gasoline from north Africa will take years to repay.

The financial downturn — and expectations of price will increase from the European Central Financial institution starting in July — are reviving issues concerning the well being of Italy’s longer-term funds. With the second highest debt-to-GDP ratio after Greece and the best authorities deficit of any main Eurozone economic system, Italy’s place is precarious.

Markets have grown gloomier on its prospects. The unfold between Italy’s 10-year bond yield and Germany’s, thought-about a barometer of political and financial dangers within the euro space, has climbed as excessive as 2 proportion factors in latest weeks, its widest for the reason that early levels of the pandemic when traders dumped riskier European authorities debt. “It’s going to become a very delicate environment,” Codogno stated.

Italy is on a path of fiscal consolidation. A goal price range deficit of 5.6 per cent is forecast for this yr, down from the 7.2 per cent recorded for final yr. However economists warned {that a} sharp slowdown in progress would elevate doubts concerning the deficit.

“If GDP is going to weaken substantially, the dynamic doesn’t look pretty,” stated Lucrezia Reichlin, an economics professor on the London Enterprise College. “The market has now become quite pessimistic and possible recession in 2022 is something many people expect.”

The inflow of EU funds for funding is one optimistic. Italians additionally amassed higher-than-usual financial savings throughout lockdowns, which might now be drawn right down to maintain consumption. However the affect will fade and the hit to disposable revenue within the coming quarters is, in response to Codogno, set to be “massive”.

Line chart of Consumer confidence index showing Italian consumers' confidence is sinking fast

Residents of Frattamaggiore are already feeling the pinch.

Sosso Fardello, 74, a retired public transport employee dwelling on a hard and fast €1,500 month-to-month pension, has reduce out just about all discretionary spending after his power payments surged. “We have to think about everything we buy, and what is necessary to live,” he stated.

The Draghi authorities this month imposed a 25 per cent windfall tax on the power corporations’ extra income to generate funds to cushion tens of millions of financially weak households, together with pensioners, with power subsidies and a one-time €200 money cost.

Pensioner Raffaele Rega, 74, who labored at a shoemaker, stated such measures weren’t sufficient. “Our pension is just enough to survive and pay for food.”

Gondola — who runs his pastry store together with his brother, brother-in-law and nephew — stated he was struggling to make the enterprise generate sufficient surplus to maintain 4 households. Month-to-month power payments that used to common €1,200 at the moment are €1,600; the small paper trays on which they serve pastries not too long ago doubled in value; gross sales are down 30 per cent since January.

Gondola had no alternative however to move on these rising prices to his clients, rising the value of a espresso from 80 cents to €1.20, and of a 1kg fruit tart from €13 to €15. He discontinued his bigger 1.5kg tarts, as a result of his clients can’t afford them any extra. “We are all trying to squeeze little pieces from a smaller cake,” Gondola stated.

Extra reporting by Martin Arnold in Frankfurt

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