Fabio Panetta in his first official speech as governor of the Bank of Italy spoke at the 30th Assiom-Forex Congress, an annual event for financial market operators, underway in Genoa.
The governor concentrated his intervention on the economy and on the prospects of the international economy. He highlighted not only the weak elements and the negative circumstances, but also the positive factors. Panetta announced that the time for a rate hike is imminent. The European economy is in a phase of stagnation with no signs of a decisive acceleration, while inflation is rapidly decreasing and the risks to price stability have reduced. In Italy, GDP growth in 2024 is expected to remain at similar levels to the 0,7% recorded in 2023, while inflation is expected to remain below 2% throughout the year.
He underlined how the ECB's restrictive monetary policy, motivated by inflationary shocks of historic proportions caused by bottlenecks in global production chains and the increase in energy prices, has prevented inflation from becoming endemic (keeping the outlook still at target of 2%), blocking the risks of a deep recession. In order for this result to be confirmed and inflation to be eradicated, allowing the economy to resume a path of growth and stability, it is essential that the next decisions are consistent with the current macroeconomic framework and this can only happen through three fundamental conditions.
Panetta: “sluggish global economy”
The "global economy remains sluggish” Panetta explains in his speech, with international trade stagnating in the fourth quarter of the previous year. “The monetary tightening implemented simultaneously by the central banks of the major countries is contributing, together with the decline in energy prices, to a sharp decline in inflation, but continues to slow down demand. The United States is an exception, where domestic demand and production activity continue to grow at a rapid pace."
Weighing on the global trend is "theuncertainty” derived from the conflicts in Ukraine and the Middle East and the difficulties of the Chinese economy linked to the real estate crisis. This "cyclical weakness" is accompanied by a setback in economic integration at a global level, with the introduction of trade restrictions and a recomposition of trade between countries. There commercial and financial fragmentation then “it risks weakening the multilateral structure that has supported global economic development since the Second World War and favored the maintenance of peace between the main powers. The consequences of a reversal of course would go beyond the boundaries of economics and finance."
Opportunities for less developed regions
“Geopolitical divisions pose significant risks for the economies of Europe and Italy, given their international openness. It is in our interest to resolutely defend the progress achieved so far in the degree of global integration and the multilateral architecture of dialogue between countries".
“In a context of more difficult international relations, continues Panetta, “belonging to the European Union and to a stable currency area such as the Eurozone, as well as joining the Atlantic bloc, become competitive advantages”.
"It's a'rare opportunity for our South” says the governor. “But translating opportunities into concrete opportunities for growth requires active capital attraction policies and the strengthening of contextual factors such as the provision of infrastructure, investments in human and social capital, the efficiency of public administrations”.
The potential of the euro area
“In the euro area theeconomic activity has stagnated for five quarters, affected by the weakness of both foreign and domestic demand. The majority of industrial sectors are in recession” (where the stagnation of Germany is worrying). What weighs heavily, says Panetta, is "the exhaustion of the push deriving from the reopenings following the pandemic, the ongoing monetary restriction and the climate of uncertainty are slowing down business investments and household purchases".
In a low growth climate there are also positive signs: "THE'increase in employment represents a positive exception to this low growth picture. There job application it was supported first by the post-pandemic production leap and then by the recomposition of the activity towards highly labour-intensive processes, made more convenient by energy increases". However, if economic activity continues to weaken, “businesses may be forced to significantly reduce staff.”
In the coming months, the "eurozone budget policies will contribute to slowing down the economy", with a more restrictive orientation especially due to the end of the stimulus measures adopted in response to the energy crisis. However, the difficulties of the European economy are not only cyclical, but also structural, making the continent's growth model particularly vulnerable to changes in the world economy.
"The potential of the European single market” recalls Panetta “they are enormous”. To benefit from it, it is necessary to rediscover that community of intent at an economic and political level that allowed a compact and timely response to the pandemic shock".
The three conditions for monetary normalization
Panetta then illustrated the three conditions to start monetary normalization. The first condition is that the disinflation process is at an advanced stage. Recent data shows progress towards price stability exceeding expectations, with inflation falling to 2,8% in January, 8 percentage points below the 2022 peak. Core inflation, which excludes food, also and energy, has declined rapidly, affecting all countries and a wide range of products in the consumption basket.
La second condition is that the decline in inflation will continue. The economic indicators and the dynamics of consumer prices clearly indicate continued disinflation. The three-month change in prices, which more accurately reflects current trends, is consistently lower than the twelve-month change, with low values for both headline and underlying inflation in both the services and goods sectors industrial.
La third condition for the start of monetary normalization is that the achievement of the inflation target is not compromised by a possible rate cut. This requirement depends on several dimensions, including the outlook for economic activity, the transmission of monetary policy to the financial and real sectors, and risks to the future evolution of inflation.
Panetta: healthy Italian banks, now strengthen their reserves
The governor also comes with a warning to the banks, made rich by rising interest rates. The main budget indicators offer a positive image of the Italian banking system "in the short term, but which over extended horizons often ends up having a negative impact on the financial conditions of families and businesses, with feedback effects on credit". And for this reason "in view of the risks that emerge the solidity of the capital is safeguarded” “drawing on last year's exceptional operating income” and building “capital reserves” with the excess capital.
