The war in Ukraine already deteriorates the complex economic scenario not only for Italy, but for all of Europe. Since the beginning of the year, global economic activity has shown signs of a slowdown, due to the spread of the Omicron variant of Covid and, subsequently, to the growing geopolitical tensions which culminated in Russia's invasion of Ukraine. The impact channels are manifold: the brake on exports to the countries involved (and not only), the economic sanctions on Russia, the bottlenecks on the supply side, the uncertainty and volatility on the financial markets, but above all the peaks historians of the increases in the prices of energy and other raw materials. The result is a spike in inflation to an all-time high. How deeply the conflict will curb the growth of the Italian economy? And how important is its duration for the purposes of economic impacts?
In the current international context, the Ukrainian conflict casts a shadow of acute uncertainty on the world economy. Bank of Italy examines the possible macroeconomic consequences of the war in three illustrative scenarios, defined on the basis of alternative hypotheses on the trend of raw material prices, international trade, uncertainty and consumer and business confidence, as well as natural gas supplies. These scenarios, Bankitalia explains, do not express an assessment of the evolution deemed most probable for the economy in the coming years and therefore do not constitute an update of the projections for Italy.
All scenarios take into account the most recent information relating to consumer price dynamics and economic activity, and in particular the GDP estimates in the first quarter of the year. They also incorporate the effects of the measures budgetary policy already adopted to counter the increases in raw material prices and those of the future evolution of interest rates inferred from the recent performance of the financial markets. However, they do not include possible further economic policy responses.
First scenario: GDP growth at 3% and inflation at 4% in 2022
In a first scenario, the most favourable, Bank of Italy (in the April economic bulletin) hypothesizes that a rapid conflict resolution could lead to a significant reduction of the tensions that currently support the prices of raw materials, thus helping to dispel uncertainty and support confidence.
From mid-2022 i gas and oil prices they would return to the levels expected at the beginning of January, canceling the increases implicit in the current futures prices and equal to around 40 percentage points in 2022 and 50 points in 2023 for gas, and around 30 and 20% respectively for oil.
The evolution of international trade is assumed to be in line with the dynamics underlying the projections for the euro area formulated in March by ECB experts. In this scenario, GDP would expand by 3% this year and by 3,1% in 2023. Inflation would be 4% in 2022 and fall to 1,8% in 2023. Compared to the projections formulated in the Economic Bulletin last January, the increase in output would be almost one percentage point lower this year, mainly due to the worse than expected trend in the first quarter, which only partially reflects the developments following the outbreak of war; growth would instead be more than half a point higher in 2023. Inflation would instead be 0,5 points higher in 2022 and 0,2 points higher in 2023.
Second scenario: GDP at 2% and inflation at 5,6% in 2022
A second, more intermediate scenario is formulated assuming a continuation of the conflict. The technical assumptions relating to the prices of the raw materials are taken from the futures contracts in the ten working days preceding 1 April. Furthermore, it is assumed that the repercussions of the continuation of the conflict on trade with Russia and Ukraine will compress the foreign demand for Italian goods and services by about 1%.
Furthermore, a deterioration in confidence and an increase in uncertainty are also incorporated, which Bankitalia assumes will however have a relatively short duration and which will end at the beginning of 2023. In this scenario, GDP growth in Italy would be equal to 2,2% in 2022 and 1,8 in 2023. Inflation would reach 5,6% this year and 2,2 in 2023. Compared to the projections formulated last January, growth would therefore be 1,6 percentage points lower in 2022 and 0,7 in 2023. In addition to the worse than expected performance in the first quarter of this year, according to the Bank of Italy, the reduction in growth is largely attributable to the effects of the increases in raw material prices; the higher inflation would almost entirely reflect the price profile of the latter.
Third scenario: GDP at 1,5% and inflation close to 8% in 2022
A third scenario, the more catastrophic one, is formulated assuming that the hostilities, in addition to prolonging, worsen resulting in a lower availability of gas for Italy, following a blockade of supplies from Russia lasting one year starting in May. For illustrative purposes, specifies Bankitalia, the hypothesis is considered that the suspension, partly compensated by recourse to other suppliers, translates into a reduction of about 10% of the production of the sector of the supply of electricity, gas, steam and air conditioning5. Furthermore, it is hypothesized that this generates bottlenecks only for manufacturing activities characterized by high energy intensity.
The resulting constraints on production would reduce the total added value of the economy by about 1,5%. In addition to this direct loss of production, there would be indirect effects linked to a lower supply from downstream sectors and a decrease in employment, income and aggregate demand.
The lower availability of gas would also determine a strong accentuation of the effects attributable to the other transmission channels. In particular, it is assumed that natural gas prices will reach levels higher than those at the beginning of January by 130 percentage points in 2022 and by around 90 in 2023; the rise in oil prices would be around 40 and 30 points, respectively.
As hostilities continue, it is also speculated that it will increase uncertainty and distrust of consumers and businesses, similar to those recorded in the major recent recession episodes. Further negative effects would derive from the repercussions of the conflict on foreign trade. In particular, a reduction in Italy's foreign demand of around 2,5 percentage points in the two-year period 2022-238 is incorporated. In this scenario, GDP would decrease by almost half a percentage point both this year and next. Compared to what was prefigured in the Economic Bulletin of last January, the product would therefore be reduced by more than 7 percentage points overall in the two-year period 2022-23. Inflation would approach 8% in 2022 and fall to 2,3 in 2023.
In the current context of very strong uncertainty, according to Bank of Italy, even more unfavorable scenarios cannot be ruled out. The consequences of the conflict on the Italian economy will also depend to a significant extent on the economic policies that can be adopted to counteract the recessionary pressures and curb the pressure on prices highlighted in the three scenarios illustrated.
