Global Economic Outlook – September 2022 Inflation reached 9.1% in August, driven by a combination Latest unemployment figures were at their lowest outside of rising energy and food prices, compared to 3.9% for of the pandemic, at 7.9% in July of this year, which points core inflation, which excludes these components (see to a degree of tightness in the labor market. However, an Chart 37). The ongoing turmoil in energy markets caused expected slowdown in growth could see the unemployment by uncertainties regarding Russian gas supplies is adding rate rise to 8.7% by the end of 2023. to pressure on household budgets and raising costs for businesses. Higher costs for businesses may in turn lead The risk of a full interruption of Russian gas supplies could to further price rises which would continue to put upward be particularly damaging to the Italian economy, which in pressure on inflation throughout the rest of this year. 2020 relied on supplies from Russia for around 43% of total 1 However, a recent fall in global food prices, which surged gas imports . A full gas shut-off could necessitate measures in the aftermath of Russia’s invasion of Ukraine, could see such as gas rationing and price controls, and lead to as a modest relief to inflationary pressures later this year and much as a 3.9 percentage point reduction in the level of 2 during 2023. Overall inflation is expected to already be GDP over 12 months . close to its peak, and to gradually fall back to 2% during the course of 2023. Tighter monetary policy by the ECB is especially challenging for the sustainability of Italy’s public sector finances. With overall government debt at over 150% of GDP in 2021, the Chart 37: Italy’s inflation remains driven second highest in the Eurozone, the cost of servicing the by energy and food components debt increases significantly as interest rates rise. Yields on Italian government bonds have risen from 1.3% to 12% Forecast 3.3% during this year alone and are now more than three 10% percentage points above the German yields, reflecting markets’ perceptions of a higher risk. Moreover, the victory 8% of the centre right coalition led by Brothers of Italy could hange6% create additional uncertainties regarding the country’s relationship with the EU. A potentially slower pace of 4% reforms could lead to tensions over the disbursement of Annual % c the nearly EUR200 billion of EU funds allocated through the 2% Covid recovery fund to Italy, which could generate additional 0% headwinds for the Italian economy. -2% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Despite the difficult domestic outlook, the Italian manufacturing sector remains an area of strength through HICP inflation Core inflation its reliance on export markets. By the second quarter of this Source: Istituto Nazionale di Statistica, KPMG analysis. year, the real value of goods exports from Italy exceeded Note: Core inflation represents HICP excluding energy, food, alcohol and tobacco. pre-pandemic levels by 9.7% and could help support overall GDP growth in our forecast as long as energy supplies are not curtailed. Dennis Tatarkov Senior Economist, KPMG in the UK 1 Eurostat, https://ec.europa.eu/eurostat/cache/infographs/energy/bloc-2c.html 2 IMF; Gabriel Di Bella, Mark J Flanagan, Karim Foda, Svitlana Maslova, Alex Pienkowski, Martin Stuermer, Frederik G Toscani; Natural Gas in Europe: The Potential Impact of Disruptions to Supply; Working Paper No. 2022/145; July 2022 © 2022 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. 38