Italy Q4 2022

Q4 2022
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Italy
Country Risk R
Report
eport
Includes 10-year forecasts to 2031
Italy Country Risk Report | Q4 2022
Contents
Executive Summary...................................................................................................................................................................... 4
Key View ..................................................................................................................................................................................................................4
Risk Summary.........................................................................................................................................................................................................5
Economic SWOT ......................................................................................................................................................................................................6
Political SWOT .........................................................................................................................................................................................................7
Economic Outlook......................................................................................................................................................................... 8
Recent Strength In Italian Economic Data Belies A Weaker Outlook .............................................................................................................8
GDP By Expenditure Outlook ............................................................................................................................................................................. 12
External Trade And Investment Outlook .............................................................................................................................14
Italian Current Account Surplus To Narrow On Higher Energy Prices ........................................................................................................ 14
Outlook On External Position ........................................................................................................................................................................... 17
Monetary Policy Outlook...........................................................................................................................................................20
ECB Hikes Rates To An 11-Year High, With More To Come............................................................................................................................. 20
Monetary Policy Outlook.................................................................................................................................................................................... 24
Fiscal Policy And Public Debt Outlook..................................................................................................................................26
Serious Italian Fiscal Consolidation Efforts Likely To Be Delayed To 2024 ................................................................................................ 26
Structural Fiscal Position ................................................................................................................................................................................... 29
Currency Forecast .......................................................................................................................................................................32
Euro To Trade Weaker For Longer ...................................................................................................................................................................... 32
10-Year Forecasts.........................................................................................................................................................................35
Major Macroeconomic Challenges Ahead ....................................................................................................................................................... 35
Political Outlook...........................................................................................................................................................................39
Italy Election Preview: Risks Of Dramatic Policy Shifts Are Overstated ..................................................................................................... 39
Long-Term Political Outlook ....................................................................................................................................................46
Fiscal Adjustments And Demographic Ageing To Dominate Italy's Long-Term Political Outlook ......................................................... 46
Global Macro Outlook .................................................................................................................................................................50
Mixed Growth Outlook Amid Headwinds ......................................................................................................................................................... 50
Index Tables ...................................................................................................................................................................................66
Macroeconomic Forecasts........................................................................................................................................................70
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Executive Summary
Key View
Core Views
• While we recently raised our full-year forecast for Italian real GDP growth in 2022 from 2.9% to 3.4% in response to strong Q222 data, this belies
a weaker outlook. Persistent inflationary pressures, tighter financial conditions that have been exacerbated by rising political risk and a rapidly
softening backdrop for external demand will all combine to push the Italian economy into recession from Q422, with activity likely to rebound
only gradually over the course of 2023. This, in turn, underpins our below consensus forecast for real GDP growth of just 0.4% in 2023.
• An unwinding of Covid-19 spending and strong linked to robust nominal economic activity will help the Italian budget deficit narrow from 7.2%
of GDP in 2021 to 5.5% this year. However, the pace of improvement will be slowed by the introduction of measures aimed at minimising the
impact from high inflation on the private sector. Given the weakening outlook for the Italian economy and due to the high likelihood that cost
of living relief measures will largely be sustained into 2023, we now anticipate that the budget deficit will hold at 5.5% in 2023 (previously 4.5%).
• A coalition of centre-right parties comprised of the Brothers of Italy, the Lega and Forza Italia will likely win a comfortable majority in Italian
parliamentary elections scheduled for September 25, with this task made easier by the failure of the left to consolidate into a single bloc. While
such a government will likely enjoy a more difficult relationship with the EU, concerns of a major clash are overstated with the centre-right
having moderated its euroscepticism tendencies. Fiscal risks are elevated, but the centre-right has also significantly watered down some of its
previous controversial policy proposals in recognition of Italy’s vulnerable macro status and weak bargaining position with relation to the EU.
• We have revised lower our forecast for Italy’s current account surplus down to 0.4% of GDP this year, from 0.6% previously and 2.4% in 2021.
This primarily reflects the ongoing deterioration in Italy’s terms of trade, a function of a weaker euro and a significant rise in the price of energy
of which Italy is a net importer. These developments will more than offset the boost to Italy’s current account position linked to a strong
rebound in the tourism sector, which has been driven by the abatement of the pandemic.
Key Risks
• Considerable uncertainty surrounds the macroeconomic outlook, with high energy prices linked to the war in Ukraine, ongoing supply chain
difficulties and the re-emergence of political uncertainty standing out as key downside risks.
• Italy's large debt load leaves the economy vulnerable to shifts in the ECB's policy stance and the central bank has now shifted to a notably
hawkish position. This is raising concerns among investors over Italy's longer-term debt sustainability, particularly given heightened political
uncertainty.
• While we believe that major clashes with the European Commission over fiscal policy will be avoided in the coming years, historically the
relationship between elements of the incoming centre-right government and Brussels has not been positive.
MACROECONOMIC FORECASTS (ITALY 2020-2023)

Indicator 2020 2021 2022f 2023f
Real GDP growth, % y-o-y -9.0 6.6 3.4 0.4
Nominal GDP, EURbn 1,657.0 1,775.4 1,971.8 2,058.7
Consumer price inflation, % y-o-y, eop -0.2 4.2 8.2 2.0
Exchange rate EUR/USD, eop 0.81 0.88 0.95 0.92
Budget balance, % of GDP -9.6 -7.2 -5.5 -5.5
Current account balance, % of GDP 3.7 2.4 0.4 1.0
f = Fitch Solutions forecast. Source: Eurostat, Fitch Solutions
Risk Summary
Economic Risk
Italy has repeatedly failed to enact necessary structural reforms aimed at addressing the country's cumbersome operating environment, massive
public debt load and long-term decline in productivity growth, which resulted in real GDP per capita effectively stagnating between 2000 and the
onset of the pandemic in 2020. Output subsequently contracted sharply in 2020 as the Covid-19 crisis hit, but outgoing technocratic Prime
Minister Mario Draghi has sought to capitalise on the EU's more relaxed attitude to its fiscal rules following the pandemic, and is seeking to return
Italy to a higher growth trajectory through significant fiscal expenditure (circa EUR250bn investment programme, including EUR192bn under the
Next Generation EU programme) and the simultaneous implementation of major reforms. As of July 2022, the government has passed legislation
aimed at streamlining court proceedings, simplifying the tax code and increasing competition.
As a result of these developments, we are more optimistic on the longer-term outlook for the Italian economy despite a negative demographic
backdrop, and we expect growth average 1.4% per annum from 2024-2031, relative to just 0.3% in the 2010s. Central to our projections is our
assumption that we will not see a rerun of the eurozone debt crisis, with the European Central Bank committed to preventing a material
fragmentation of the eurozone sovereign debt market.
Political Risk
Political risk in Italy has risen following the collapse of former European Central Bank President Draghi's government of national unity in mid-July.
Polling data currently suggest that a centre-right coalition comprised of the Brothers of Italy, Forza Italia and the Lega will win a comfortable
majority in elections planned for September 25. Lacking an authoritative figure like Draghi and with each member of the government jostling for
influence, we believe that the outlook for policymaking has meaningfully deteriorated and government stability risks have increased.
We do not anticipate a repeat of the Italian government's clashes with the European Commission in 2018 and 2019, owing to the fact that the
centre-right is constrained by Italy's elevated debt load, which means it must comply with the EU's fiscal rules (which in any case are currently
suspended and are likely to be reformed) in order to ensure Italian sovereign debt remains eligible for purchase under the European Central Bank's
Transmission Protection Instrument. The government must also abide by the reform leg of its Recovery and Resilience plan, so as to safeguard its
allocation of the Next Generation EU recovery fund. Nonetheless, tensions are likely to rise between Rome and Brussels at times, which may
occasionally prompt both macro and financial market volatility in the coming years.
Economic SWOT
Strengths Weaknesses
• Italy's per capita wealth remains high by European standards, • Persistently low productivity growth, reflecting a weak business
while household debt is relatively low. environment and weak structural reform progress over the past
• Notwithstanding a poor competitiveness record, Italy remains decade.
the world's eighth largest economy, with a comparative • Relatively high levels of corruption and cronyism in certain
advantage in a number of areas including industrial design and areas of the economy have led to inefficiency and insufficient
innovation, fashion and clothing. allocation of resources.
• Criminal syndicates remain powerful and widespread in many
Southern regions, holding back economic development.
• Highly fragmented banking sector with large variability in asset
quality and capital adequacy.
Opportunities Threats
• Comprehensive reforms of the labour market, the education • High public debt will remain a constant risk to macroeconomic
system, competition policy and a general simplification of stability in the case of economic or interest rate shocks.
bureaucracy could induce a reversal of trend in the brain drain • A period of trade union unrest, following deep reforms of the
that has characterised the country over the past 30 years. social security system, could disrupt economic operations and
• Though Italy's manufacturing sector has suffered through weigh on Italy's attractiveness to foreign investors.
competition from Mainland China and other low-cost centres, • Additional bank failures could quickly destabilise the financial
the country does have the human capital and capital resources sector and government fiscal position.
to move higher up the value-added chain.
Political SWOT
Strengths Weaknesses
• Italy is a long-standing member of the EU, which implies a level • Italy has experienced frequent changes in government since
of commitment to democratic and transparent government. the restoration of democracy in 1946, changing once every 13
• Italy has a democratic political culture which, despite frequent months on average.
crises in the governments of the day, has lasted for nearly eight • Parliament is highly fragmented, with over ten parties currently
decades. represented in the Chamber of Deputies and Senate.
• Italy is an active and influential member of many multinational • Structurally low growth has seen households' real incomes
organisations, including NATO and the WTO, and maintains decline in recent decades which, added to elevated youth
cordial relations with neighbours. unemployment, has clouded the medium-term growth outlook.
• Strong and entrenched pressure groups, from trade unions
through to corporate lobbies, have the power to resist reforms,
creating a high level of inertia.
Opportunities Threats
• Italy is a key beneficiary of the Next Generation EU Recovery • Italy's population is ageing at a rapid pace, with the working age
Fund, with its receipt of EUR191.5bn allocation conditional on population having fallen from a high of 69.1% in 1992 to 63.8%
the implementation of several structural reforms. as of 2020.
• Italy relies heavily on non-renewable for energy generation,
which in the context of continued high energy prices amid the
carbon neutral transition may put upward pressure on inflation
in the medium term.
Economic Outlook
Recent Strength In Italian Economic Data Belies A Weaker Outlook

Key View
• While we recently revised modestly higher our real GDP growth forecast for Italy in 2022 from 2.9% to 3.4%, we project that the economy will
expand by just 0.4% in 2023.
• After a strong 1.0% q-o-q expansion in Q222 (from 0.1% q-o-q in Q122), we believe that activity will quickly lose momentum as cost of living
issues linked to high energy prices weigh heavily on domestic demand.
• Growth will be further held back by a tightening of financial conditions as the European Central Bank proceeds with its hiking cycle, with the
impact exacerbated in Italy by a sharp rise in political risk following the collapse of the Mario Draghi-government that has pushed government
bond yields higher.
We recently revised modestly higher our real GDP growth forecast for Italy in 2022 from 2.9% to 3.4%, following the release of
better than expected data for Q222. The economy expanded by a robust 1.0% q-o-q (4.6% y-o-y), after a slight 0.1% rise in Q122, and
outperformed relative to the wider eurozone (+0.7% q-o-q). A GDP breakdown is not yet available, but Istat confirmed that growth was driven by a
rebound in domestic demand as the pandemic receded as a headwind. From an output perspective, we suspect that (as in Spain) a recovery in the
key tourism industry – which has been hobbled by restrictions on international travel since Q120 – acted as a major tailwind, a view backed by
indicators such as the PMIs and by daily flights data.
Italian Economic Activity To Lose Considerable Momentum

Italy - Real GDP, % chg
Our move to revise higher our 2022 forecast should not be understood as us turning more upbeat on the Italian outlook. We
forecast real GDP growth at just 0.4% in 2023. Ultimately, we struggle to see momentum in activity being sustained through Q322, with the
economy set to exhibit recession-like symptoms at least until late H123. Our downbeat view is in turn underpinned by our expectation that cost of
living issues, linked primarily to higher electricity prices as questions continue to surround Italian energy security due to its high reliance on
Russian natural gas exports, will increasingly act as a major drag as the boost from the post-pandemic release of demand fades. The impact will be
compounded by a simultaneous tightening of financial conditions associated with the European Central Bank’s (ECB) nascent hiking cycle and
with the sharp rise in political risk following the collapse of the Draghi-led government of national unity in July.
Weak Outlook For Consumption Underpins Our Downbeat Forecasts

Italy - Real GDP, % chg & Contributions To Growth, pp
GDP By Expenditure Breakdown
We forecast that consumer spending growth will print at 3.4% this year, but will slow to just 0.2% in 2023. An impressive outturn in
2022 will largely reflect statistical carryover effects from H221, as well as the post-pandemic surge in services expenditure in Q222 that appears to
have more than offset weakness in goods spending suggested by weak retail sales growth. This splurge was supported by a tightening of labour
market conditions in the quarter, as well as by what we suspect was a substantial decline in the personal savings rate.
Labour Market Tightens, While Rundown Of Excess Savings Further Supports Consumption
Italy - Labour Market Slack, % (LHC) & Personal Savings Rate, % (RHC)
Source: Eurostat, Fitch Solutions
These tailwinds will, however, gradually abate over H222 and into early 2023. As noted, survey data suggest that the post-pandemic rebound in the
services sector is faltering, as cost of living issues have begun to dominate. While the unemployment rate dropped to a 10-year low of 8.1% in June,
nominal wage growth remains anaemic. With inflation running at 8.4% y-o-y, this has delivered a major hit to real disposable incomes, which is
being only partially offset by fiscal subsidies that are worth roughly 2.0-2.5% of GDP but are aimed at both businesses and households. There are
also some early signs that peak labour market tightness has already been reached, with deteriorating business confidence likely to see hiring slow.
Against this backdrop, we suspect that consumer confidence will remain subdued, with demand for precautionary savings possibly set to push
higher.
Sharply Negative Real Wage Growth Pushing Consumer Confidence Lower

Italy - Wage Growth, % chg y-o-y (LHC) & Consumer Confidence, balance of responses (RHC)
Source: Eurostat, Istat, Fitch Solutions
We forecast that fixed investment will increase by 9.0% in 2022, though as with consumer spending this will primarily reflect
strong growth in prior quarters and we expect growth will ease to 1.0% in 2023. The construction sector in particular has recovered
strongly from the pandemic, aided by a government sponsored retrofitting scheme. Strong demand for housing linked to lower interest rates, a
tighter labour market and improved household balance sheets has acted as a further tailwind. Investment into machinery and equipment has also
been quite strong, and was already some 9.0% above its pre-pandemic level in Q122.
Investment Expectations Decline Markedly, In Tandem With Plunging Business Confidence

Italy - Firms' Assessment Of Investment Conditions, balance of responses (LHC) & Business Confidence (Activity Next Three Months),
balance of responses (RHC)
Source: Bank of Italy, Istat, Fitch Solutions
Looking ahead, the implementation of Italy’s EUR191.5bn Recovery and Resilience plan (which we do not anticipate will be seriously derailed by
the change in government), and to a lesser extent an easing of global supply chain issues, will support growth in fixed capital formation. The
backdrop for private sector investment – a function of the future growth outlook and financial conditions – has unquestionably weakened, with
investment intentions clearly turning over. Both business and household confidence have plunged in recent months, while the impact from the
ECB’s more hawkish policy stance has been quickly felt (see chart below). In addition to the outright rise in interest rates, credit conditions have
also tightened notably in response to a higher cost of funds and due to bank balance sheet constraints per the ECB’s Q222 Bank Lending Survey.
Italian Financial Conditions Have Tightened Notably

Italy - Italian Sovereign Yield Curve, % (LHC) & 10-Year Yield Spread Relative To Germany, bps
Source: Bloomberg, Fitch Solutions
We see net trade acting as a modest drag on growth this year (-0.3pp), while we anticipate that it will have a broadly neutral impact
in 2023. The recovery in the key tourism sector (10.6% of GDP in 2019) will support Italian service exports this year (20% of total exports in 2019),
but we suspect this will be more than offset by strength in imports linked to the rebound in domestic demand. Looking further ahead, survey data
suggest that industrial export orders are weakening rapidly as the ongoing rebalancing from services to goods expenditure has been exacerbated
by a generally softer economic backdrop in key trading partners in Europe. As a period of economic malaise sets in on the continent this winter, we
anticipate that this will also weigh on service exports in 2023. However, the impact on growth will be offset by a similarly large decline in Italian
import demand.
Rebound In Tourism Industry, But Backdrop For Goods Exports Weakens

Selected Economies - Daily Flights, % of 2019 level (seven-day moving average) & Assessment Of Industrial Export Orders, balance
of responses
Source: Eurocontrol, Eurostat, Fitch Solutions
Risks To Outlook
Risks to our forecasts are tilted significantly to the downside. A potential cessation of Russian natural gas exports stands out as the key
threat, given they account for 10% of Italian energy consumption even after recent diversification efforts. Per the IMF, output could contract by up
to 5.5pp in the event of a complete stoppage that requires the introduction of rationing. In addition to the energy situation, we note that should
the next (likely right-wing) government pursue a more antagonistic relationship with Brussels, this would also act as a major headwind to growth
via its impact on financial conditions and owing to the implications for the implementation of Italy’s Recovery and Resilience plan.
GDP By Expenditure Outlook

Italy has been a chronic eurozone underperformer since the inception of the single-currency area, with real GDP 3.8% lower in 2019 relative to the
pre-crisis peak, weighed down by stagnant productivity growth and a steady loss of competitiveness. The situation deteriorated further in 2020
when the impact of the pandemic saw output contract by 9.0%. Nonetheless, we have turned modestly more optimistic on the longer-term
outlook, with Italy taking the opportunity offered by the crisis to implement reforms and spending measures aimed at boosting productivity
growth, backed by the inflow of EUR192bn of funds under the Next Generation EU recovery fund. We anticipate that this will help to offset the drag
from an adverse demographic profile. This will see growth average a solid 1.4% from 2024 to 2030, after a short-lived recession in 2023 stemming
from Europe's ongoing energy crisis. This compares favourably to the 0.3% average rate observed in the 2010s.
GDP GROWTH FORECASTS (ITALY 2020-2025)

Indicator 2020 2021 2022f 2023f 2024f 2025f
Nominal GDP, EURbn 1,657.0 1,775.4 1,971.8 2,058.7 2,124.5 2,196.4
Real GDP growth, % y-o-y -9.0 6.6 3.4 0.4 1.8 1.4
GDP per capita, EUR 27,405 29,410 32,719 34,227 35,396 36,682
GDP GROWTH FORECASTS (ITALY 2026-2031)
Indicator 2026f 2027f 2028f 2029f 2030f 2031f
Real GDP growth, % y-o-y 1.4 1.4 1.4 1.4 1.4 1.4
Private Consumption: Household spending will be an important driver of real GDP growth over the coming years, aided by an ongoing
improvement in labour-market conditions and from spillover effects associated with the government's capital expenditure plans. We see scope for
the government's pursuit of active labour-market policies to act as a further tailwind, though it is too early to determine whether they will be
sufficient to permanently increase Italy's low labour force participation rate, reduce youth unemployment and tackle what is a stark regional wealth
divide between the North and the South. In one bright spot, household debt ratios in Italy are closer to that of emerging economies as opposed to
developed peers, which implies that debt repayment burdens are low and that consumers have room to leverage up if incomes rise and labour
market conditions improve.
PRIVATE CONSUMPTION FORECASTS (ITALY 2020-2025)

Indicator 2020 2021 2022f 2023f 2024f 2025f
Private final consumption, EURbn 958.9 1,025.8 1,137.7 1,185.4 1,223.4 1,266.2
Private final consumption, % of GDP 57.9 57.8 57.7 57.6 57.6 57.6
Private final consumption, real growth % y-o-y -10.6 5.2 3.4 0.2 1.8 1.5
PRIVATE CONSUMPTION FORECASTS (ITALY 2026-2031)
Private final consumption, EURbn 1,310.5 1,356.4 1,403.8 1,453.0 1,503.8 1,556.5
Private final consumption, real growth % y-o-y 1.5 1.5 1.5 1.5 1.5 1.5
Government Consumption: A high public debt load will act as somewhat of a long-term constraint on public sector consumption, though the
government has indicated that it plans to maintain wide budget deficits in the coming years and will not adopt austerity measures. Some of this
expenditure will be financed by inflows of EU funds under the Next Generation EU programme, with Italy planning to raise current expenditure by
1.2% of 2019 GDP between 2021 and 2027. More generally, we anticipate that an ageing economy will see health expenditure continue to push
higher, resulting in government spending's share of GDP holding in an 18-20% range.
GOVERNMENT CONSUMPTION FORECASTS (ITALY 2020-2025)

Indicator 2020 2021 2022f 2023f 2024f 2025f
Government final consumption, EURbn 344.0 351.5 378.5 395.9 405.4 417.6
Government final consumption, % of GDP 20.8 19.8 19.2 19.2 19.1 19.0
Government final consumption, real growth % y-o-y 0.5 0.6 0.2 0.6 1.0 1.0
GOVERNMENT CONSUMPTION FORECASTS (ITALY 2026-2031)
Government final consumption, EURbn 430.1 443.0 456.3 470.0 484.1 498.7
Gross Fixed Capital Formation: Italy underwent a prolonged slump in fixed investment spending in the years leading up to the pandemic. This
reflected broad-based weakness, though the contraction was most prominent in the construction sector. Looking ahead, however, we anticipate
that healthy balance sheets, rising house prices and government incentives will see residential investment rebound strongly from the pandemic.
At the same time, the sector will benefit from the Italian Government's ambitious capital investment plans, with the Next Generation EU
programme set to finance spending worth some 8.5% of 2019 GDP between 2021 and 2027. We anticipate that a depleted capital stock will also
be upgraded as domestic and external demand conditions improve, and fixed investment activity will be encouraged by a recovering banking
sector and a gradually more amenable business environment and tax code. That said, political instability can endanger the reform agenda.
FIXED INVESTMENT FORECASTS (ITALY 2020-2025)

Indicator 2020 2021 2022f 2023f 2024f 2025f
Fixed capital formation, EURbn 295.7 353.5 411.9 432.4 449.7 467.7
Fixed capital formation, % of GDP 17.8 19.9 20.9 21.0 21.2 21.3
Fixed capital formation, real growth % y-o-y -9.1 17.0 9.0 1.0 2.6 2.0
FIXED INVESTMENT FORECASTS (ITALY 2026-2031)
Fixed capital formation, EURbn 486.4 505.9 526.1 547.2 569.1 591.8
Fixed capital formation, real growth % y-o-y 2.0 2.0 2.0 2.0 2.0 2.0
Net Exports: Italy has seen a steady loss of global market share in the past decade, which will be difficult to get back amid weak global trade
growth given our assumption that the process of globalisation will slow further over the 2020s. The structural rigidities posed by being a eurozone
member make downward wage adjustments the most viable way to quickly boost cost competitiveness, but Italy's inflexible labour markets, strong
union-level bargaining powers and lack of political will to reform have impeded this adjustment since the global financial crisis. As a result,
regaining external competitiveness will have to come primarily via investment and productivity gains instead of downward wage adjustments,
which are not politically viable given widespread aversion to austerity measures across the electorate. While we believe that the Recovery and
Resilience Plan reforms are a step in the right direction, it is too soon to judge the extent to which they will see Italy regain competitiveness. Indeed,
we see net trade continuing to act as a modest drag in the coming years, as domestic demand grows solidly.
NET EXPORTS FORECASTS (ITALY 2020-2025)

Indicator 2020 2021 2022f 2023f 2024f 2025f
Net exports of goods and services, EURbn 60.7 42.9 41.9 43.0 44.0 43.0
Net exports of goods and services, % of GDP 3.7 2.4 2.1 2.1 2.1 2.0
Net exports of goods and services, real growth % y-o-y -27.3 1.2 -12.5 -2.0 0.6 -5.7
NET EXPORTS FORECASTS (ITALY 2026-2031)
Net exports of goods and services, EURbn 41.8 40.4 38.8 37.1 35.1 32.8
Net exports of goods and services, % of GDP 1.8 1.7 1.6 1.5 1.4 1.2
Net exports of goods and services, real growth % y-o-y -6.3 -7.1 -8.1 -9.2 -10.6 -12.5
External Trade And Investment Outlook
Italian Current Account Surplus To Narrow On Higher Energy Prices

Key View
• We have revised down our forecast for Italy’s current account surplus to 0.4% of GDP in 2022, from 0.6% previously and 2.4% in 2021.
• This primarily reflects the ongoing deterioration in Italy’s terms of trade, a function of a weaker euro and a significant rise in the price of energy
of which Italy is a net importer.
• These developments will more than offset the boost to Italy’s current account position linked to a strong rebound in the tourism sector, which
will be driven by the abatement of the pandemic.
We have revised down our forecast for Italy’s current account surplus to 0.4% of GDP in 2022, from 0.6% previously and 2.4% in
2021. This primarily reflects the ongoing deterioration in Italy’s terms of trade, a function of a weaker euro and a significant rise in the price of
energy of which Italy is a net importer. The spot price of natural gas, which accounts for 40% of Italian energy consumption, has increased by a
factor of three this year, while Brent crude is up by around 20% since January 1. We suspect that these developments will more than offset the
boost to Italy’s current account position linked to a strong rebound in the tourism sector, which will be driven by the abatement of the pandemic.
The latest data support our view, with Italy’s current account deficit having narrowed to EUR15.2bn (0.8% of GDP) in the 12-months to May from
EUR70.7bn a year previous as high energy prices saw the goods surplus worsen.
Italy Current Account Surplus To Narrow

Italy - Current Account Balance & Components, % of GDP
f = Fitch Solutions forecast. Source: Bank of Italy, Fitch Solutions
Over the full year, we expect that Italy’s goods trade balance will narrow from 3.0% of GDP in 2021 to an 11-year low of 0.6% in
2022. Lower energy prices and subdued import demand amid persistently soft domestic economic conditions were key factors behind the uptick
in Italy’s goods trade surplus over the 2010s. The first of these factors has now sharply reversed, with both natural gas and oil prices surging in the
year-to-date as mentioned above. Importantly, our Oil & Gas team believe that elevated hydrocarbon prices are here to stay given a subdued
supply picture. Import growth has been further bolstered by a sharp rebound in real GDP following the pandemic, though we believe that this
strength is more likely to subside in the coming quarters as the Italian economy enters recession.
Deteriorating Terms Of Trade A Key Factor Behind The Worsening Trade Balance
Italy - Exports And Imports, % chg y-o-y (LHC) & Export And Import Prices, index (RHC)
Source: Istat, Fitch Solutions
In the year-to-date, Italian goods export growth has held up reasonably well. Exports have been aided by a reasonably solid demand backdrop in
key trading partners in Europe and the fact that Italian industrial production has been less impacted by global supply chain issues. The situation is,
however, now clearly deteriorating. Industrial production declined by 1.1% m-o-m and 2.1% in May and June. Export orders have softened as
European growth prospects have soured and the goods to services rebalancing process has continued.
Weakening Industrial Activity And Softer Orders Data Bode Poorly For Export Growth
Italy - Industrial Production, % chg (LHC) & Industrial Export Orders, balance of responses (RHC)
A narrowing goods trade surplus will in part be offset by an improvement in the services trade balance, which we anticipate will
improve from a deficit of 0.6% of GDP in 2021 to 0.1% this year. Underpinning this projection is our expectation for a continued strong
rebound of the key tourism sector, which accounted for 40% of all services exports in 2019. Tourism activity collapsed in response to the
pandemic, but has bounced back strongly in recent months as Covid-19 restrictions have been removed and travellers from the US have been
enticed by a weaker euro. We do note that Italy’s recovery appears to be lagging peers in Southern Europe (see chart below), which we suspect is a
function of its greater reliance on Mainland Chinese tourists.
Recovery In The Key Tourism Sector Supporting Service Sector Exports

Italy - Services Exports, % of 2019 Level (LHC) & Daily Flights, % of same week in 2019
Source: Bank of Italy, Eurocontrol, Fitch Solutions
Turning to the primary account balance, we continue to see it narrowing slightly from a surplus of 1.2% in 2022 to 1.0% this year.
The primary income account balance improved markedly throughout the pandemic as Italy experienced a deeper contraction than in peers, while
it also took longer to recover with real GDP having only returned to its pre-pandemic level in Q222. We now see this impact partially unwinding. A
more pronounced deterioration should, however, be prevented by the significant weakening of the euro this year, as well as the notable
improvement in Italy’s net international investment position in recent years (from -2.5% of GDP in 2019 to +6.5% in Q122).
Italy's External Debt Load Compares Favourably To Peers

Italy - External Debt, % of GDP
As before, we remain of the view that risks to Italy’s external financing positions are low. Despite concerns surrounding Italy’s elevated
debt-to-GDP ratio, a low proportion of this is held abroad and Italy’s external debt ratios actually compare favourably to peers. Italy also holds
foreign assets worth approximately 190% of GDP, while it has consistently run a current account surplus since 2013. Finally, we note that as a
member of the eurozone, the risk of a ‘sudden stop’ is mitigated by the existence of the Target 2 settlement system as we have previously seen
during the Euro Debt Crisis.
Outlook On External Position

Structural Characteristics
Net International Investment Position (NIIP): Italy's NIIP has risen steadily from a trough of roughly -20.0% of GDP in 2013 to a surplus of
7.4% in 2021, a period that has also seen the current account balance move firmly into surplus. With respect to the underlying breakdown, the
largest changes have been in the portfolio and other investment sub-components. The former has moved sharply into surplus in recent years as
Italian residents have increasingly favoured foreign investments. Other investment liabilities have increased markedly, as the European Central
Bank (ECB)'s bond-buying activities have led to a dramatic increase in the Banca d'Italia's TARGET2 liabilities. These liabilities, which represent an
IOU to the rest of the eurosystem, pose limited downside to Italy's macroeconomic stability and indeed this mechanism helped to prevent the
emergence of a balance of payments crisis during the eurozone debt crisis.
NIIP Returns To Surplus

Italy - Net International Investment Position, EURmn
Source: Eurostat, Banca d'Italia, Fitch Solutions
External Debt: Italy has a large external debt stock that was equal to 135% of GDP at the end of Q421. Italy's massive public debt load (over 150%
of GDP) and large stock of foreign liabilities do pose somewhat of a risk to macroeconomic stability due to the potential for a loss of foreign
confidence and capital flight to drive borrowing costs to unsustainable levels, having knock-on effects in the domestic banking sector, which is the
largest holder of Italian government debt. However, eurozone membership has mitigated the associated risks, primarily via the ECB's various asset
purchase programmes that in effect creates an unconditional buyer of Italian government debt securities.
External Debt Continues To Trend Higher

Italy - Gross External Debt By Sector, EURmn (LHS) & Gross External Debt, % of GDP (RHS)
Source: Banca d'Italia, Fitch Solutions
Balance Of Payments: Italy's current account surplus will narrow over the medium term. Large historic trade surpluses were unsustainable, as
they reflected softness in domestic demand, amplified by the pandemic in 2020 and 2021, that we do not expect to persist given an improving
labour market and plans for a significant increase in public-sector investment. Higher energy prices relative to the second half of the 2010s will act
as an additional headwind, particularly in 2022. The negative impact on the current account surplus in the medium term should be somewhat
offset by the government's push to adopt productivity enhancing reforms that we believe will result in a modest improvement in Italy's external
competitiveness.
Surplus Stable Over Long Term

Italy - Current Account Balance (2020-2031)
ITALY - CAPITAL & FINANCIAL ACCOUNT BALANCE

Indicator 2013 2014 2015 2016 2017 2018 2019 2020
Capital account, USDbn -0.5 2.1 5.5 -2.4 1.1 -0.3 -1.6 -0.4
Financial account, USDbn 32.4 72.9 43.1 36.2 53.7 35.9 51.6 71.5
Capital and financial account, % of GDP 1.5 3.5 2.6 1.8 2.8 1.7 2.5 3.8
Net FDI inflows, USDbn 0.9 3.1 2.0 -12.3 0.5 -4.9 1.6 21.7
Net portfolio investment, USDbn -5.1 -2.2 105.7 154.8 94.8 141.9 -58.0 123.6
Net other Investment, USDbn 30.5 75.1 -66.5 -101.3 -36.4 -105.4 110.6 -75.1
TOP FIVE GOODS EXPORTS

By Market % of Total Exports By Category % of Total Exports
Germany 12.8 Machinery, mechanical appliances, nuclear reactors, boilers 18.3
France 10.3 Vehicles other than railway or tramway rolling stock 7.7
US 9.8 Pharmaceutical products 7.3
Switzerland 5.8 Electrical machinery and equipment 6.2
UK 5.2 Plastics and articles thereof 4.1
Source: ITC, Fitch Solutions
TOP FIVE GOODS IMPORTS

By Market % of Total Imports By Category % of Total Imports
Germany 16.3 Machinery, mechanical appliances, nuclear reactors, boilers 10.2
China (Mainland) 8.7 Vehicles other than railway or tramway rolling stock 9.0
France 8.5 Electrical machinery and equipment 8.5
Netherlands 5.9 Mineral fuels, mineral oils and products of their distillation 8.5
Spain 5.3 Pharmaceutical products 6.9
Source: ITC, Fitch Solutions
CURRENT ACCOUNT BALANCE FORECASTS (ITALY 2020-2025)

Indicator 2020 2021 2022f 2023f 2024f 2025f
Balance of trade in goods, EURbn 68.2 53.0 11.7 22.8 32.3 31.7
Balance of trade in goods, % of GDP 4.1 3.0 0.6 1.1 1.5 1.4
Balance of trade in services, EURbn -7.4 -11.4 -1.3 1.0 -3.6 -4.2
Balance of trade in services, % of GDP -0.4 -0.6 -0.1 0.0 -0.2 -0.2
Primary income balance, EURbn 20.4 21.2 20.0 19.2 20.4 21.1
Primary income balance, % of GDP 1.2 1.2 1.0 0.9 1.0 1.0
Secondary income balance, EURbn -19.1 -19.4 -22.6 -23.4 -24.2 -25.0
Secondary income balance, % of GDP -1.2 -1.1 -1.1 -1.1 -1.1 -1.1
Current account balance, EURbn 62.1 43.4 7.8 19.6 24.9 23.5
Current account balance, % of GDP 3.7 2.4 0.4 1.0 1.2 1.1
CURRENT ACCOUNT BALANCE FORECASTS (ITALY 2026-2031)
Balance of trade in goods, EURbn 31.0 30.2 29.4 28.5 27.5 26.5
Balance of trade in goods, % of GDP 1.4 1.3 1.2 1.1 1.1 1.0
Balance of trade in services, EURbn -4.3 -4.5 -4.6 -4.7 -5.2 -5.1
Balance of trade in services, % of GDP -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
Primary income balance, EURbn 21.8 22.6 23.4 24.2 25.0 25.9
Primary income balance, % of GDP 1.0 1.0 1.0 1.0 1.0 1.0
Secondary income balance, EURbn -25.9 -26.8 -27.8 -28.7 -29.7 -30.8
Secondary income balance, % of GDP -1.1 -1.1 -1.1 -1.1 -1.1 -1.1
Current account balance, EURbn 22.6 21.5 20.4 19.2 17.6 16.5
Monetary Policy Outlook
ECB Hikes Rates To An 11-Year High, With More To Come

Key View
• At Fitch Solutions, we expect the ECB to hike its deposit rate by a further 75bps to 1.50% by end-2022, after it raised rates by 75bps to 0.75%
on September 8 2022.
• The central bank’s hawkish shift comes as leading officials have challenged the approach of the Bundesbank, arguing that even if inflation was
supply-side driven, it needed to tighten aggressively in order to prevent misaligned expectations, even if this were to come at the cost of a
recession.
• Eurozone fiscal dynamics will create headaches for the ECB in the coming months, as governments loosen policy at a time when interest rates
are being raised aggressively. Bond yields - particularly in the periphery - are rising, meaning the central bank will likely have to intervene to
stave off a crisis.
At Fitch Solutions, we expect the European Central Bank (ECB) to hike its policy rate by a further 75 basis points (bps) to 1.50% by
the end of 2022. As we highlighted, the central bank opted to raise its deposit rate by 75bps to 0.75% on September 8 2022, a record single
meeting increase outside of a technical rise at the foundation of the euro. The associated meeting materials offered little in the way of forward
guidance, with President Christine Lagarde signalling in the press conference that the central bank would take a meeting-by-meeting approach in
the coming months. ECB Chief Economist Philip Lane had previously stressed the merits of following this approach in what is a highly uncertain
economic environment. We are not taking this as a sign, however, that the tightening cycle is near an end. The hawks on the Governing Council
have stressed the need to hike to at least neutral by year-end, which the ECB estimates at around 1.50%.
It Will Be Difficult To Extend A Hiking Cycle Beyond Q422

Eurozone - Central Bank Policy Rate, %
Hawks are perturbed by the fact that both core and headline readings of inflation are consistently overshooting the ECB's 2.0%
target, having picked up to 9.1% y-o-y and 4.3% in September 2022 respectively. In keeping with the broader central banking community,
these officials are concerned that their hard-won ‘credibility’ is now under threat and there is a risk that inflation expectations miss the target. This
is an outcome that concerns central bankers who have argued that anchored expectations underpinned the period of relative economic stability
since the 1990s, while underplaying the fact that this period has been marked by a recurring pattern of financial market meltdowns that were less
common in the Bretton Woods regime from roughly 1945-1971. As a result, central bankers are now increasingly talking ‘tough’ and signalling that
a monetary policy-driven recession is a price worth paying to ensure that they retain their credibility. September 8's hikes come as the ECB revises
lower its forecast for real GDP growth to 0.9% in 2023, from 2.1% in June 2022.
Inflation Above Target And Forecasting Has Been A Challenge

Eurozone - HICP Inflation, % chg y-o-y (LHC) & HICP Inflation & ECB Forecast Profile, % chg y-o-y (RHC)
Source: ECB, Eurostat, Fitch Solutions
As part of this global shift, ECB officials have argued that policy decisions should be tied to developments in spot inflation, rather
than forward-looking indicators such as inflation expectations and wage growth. This partly reflects central bankers surrendering as they
have repeatedly underestimated the persistence of price pressures. Member of the Executive Board of the ECB Isabel Schnabel, in particular, has
argued that focusing on the demand side ignores the fact that we may be entering a period of ‘great volatility’, where inflation is driven by
persistent supply shocks linked to factors such as deglobalisation, the energy transition and geopolitical tensions. As an energy importer, Schnabel
has also hinted that tighter policy is necessary to support the euro and reduce the impact from a worsening of the eurozone's terms of trade
linked to elevated oil and gas prices.
Forward-Looking Indicators Hardly Consistent With Sustained Inflation

Eurozone - Wage Growth, % chg y-o-y (LHC) & EC Sentiment Selling Price Expectations, balance of responses (RHC)
Source: Eurostat, FRED, Fitch Solutions
Against this backdrop, Schnabel has argued that lessons are to be drawn from how the Bundesbank conducted policy in the
1970s, which frontloaded hikes in response to both the 1973 and 1979 oil price shocks. Hawks in the ECB have argued that this was a
significant factor behind the lower inflation that Germany experienced over the 1970s and this negated the need for a ‘Volcker’ moment in the
early 1980s as central banks elsewhere hiked aggressively to re-establish credibility. This argument puts considerably less weight on the role of the
pronounced appreciation of the Deutsche Mark following the introduction of floating interest rates in 1971 or on the less aggressive stance of
trade unions relative to their Anglo-American peers due to differing institutional frameworks.
Bundesbank Held Up As The Example To Follow

West Germany - CPI Inflation, % chg y-o-y & Bundesbank Policy Rate, %
Source: Bundesbank, Fitch Solutions
We are less convinced by the merits of moving in this direction at a time when the eurozone is facing a severe shock that is likely
to push the economy into recession from Q422, mitigating second-order effects from the current spike in price pressures. We note
that references to the 1970s pass over the fact that the ECB pursued a similar approach in 2008 and 2011 when the eurozone economic outlook
was similarly downbeat. These were quickly reversed and were widely viewed as policy errors that exacerbated the subsequent downturn.
Policymakers readily acknowledged this earlier in the year, with President Lagarde commenting in Q122 that rate hikes will not fill pipelines with
gas and stressing that the ECB’s approach would be ‘gradual’ as recently as the June Governing Council meeting.
ECB Has Been Forced To Reverse Course Before

Eurozone - Real GDP, % chg q-o-q & Deposit Rate, %
Nonetheless, we do acknowledge that the ECB’s view has shifted, so we are forecasting a faster pace of tightening. In terms of
timing, we expect that the central bank will opt for another large 50bps increase in October 2022 (though 75bps is clearly in play) after another
uptick in inflation in September 2022, before stepping down the pace of tightening with a 25bps hike in December 2022. While the weakening
growth environment poses some downside to our forecasts, the ECB has clearly signalled that the bar for softer economic data to derail a hiking
agenda is higher when inflation is overshooting target as dramatically as it is now. We think that a recession and peak inflation will see the ECB shift
into pause mode over 2023, but the outlook is highly uncertain and Lagarde signalled in September 2022 that the hiking cycle was likely to
continue for four or five more meetings (ie, Q123 or Q223).
Incomplete Fiscal Union Creates Problems For The ECB
In addition to growth considerations, eurozone fiscal dynamics may also create some headaches for the ECB in the coming
months. Officials have flagged that monetary policy tightening will be at least partially offset by fiscal easing, but the eurozone’s incomplete fiscal
union and varying levels of sovereign risks within the eurozone will complicate matters. Bond markets are already testing the ECB’s resolve, with
the closely watched spread between 10-year Italian and German bonds currently testing the key 250bp threshold. The ECB avoided addressing
this issue at its September 2022 meeting, fielding as many questions on when it may begin to reduce the size of its balance sheet in the
accompanying press conference as it did on the potential introduction of spread control.
Higher Rates For Longer, With Spreads Pushing Wider

Eurozone - Euro Swaps Curve, % (LHC) & 10-Year Spread Vs Germany, bps (RHS)
Despite its reticence, we expect that the ECB will ramp up interventions beyond its current commitment to flexibly reinvest
maturing proceeds from the EUR1.85trn Pandemic Emergency Purchasing Programme. However, based on past form, the situation
may have to deteriorate further before this happens. Subsequent action is most likely to involve the activation of the Transmission Protection
Instrument that was unveiled in July 2022, as well as a loosening of the attached conditions. That said, any loosening of conditionality is likely to be
implicit rather than explicit, as the ECB looks to dodge legal challenges from Berlin. The potential for a prolonged loosening of fiscal policy as
Europe’s energy crisis drags on raises a separate question as to whether a sharp rise in national debt servicing costs across the bloc requires the
ECB to move from implicit spread control to yield control, but we are still some distance from this point.
Monetary Policy Outlook

ECB Structure: The European Central Bank (ECB) has been the institution responsible for conducting monetary policy in the eurozone since
January 1 1999, when the euro currency was first adopted by 11 EU members. The Governing Council and the Executive Board are the ECB’s
decision-making bodies, while a third body, the General Council, only has an advisory capacity. The Governing Council, which is responsible for
formulating monetary policy and establishing guidelines for its implementation, is composed of the six members of the Executive Board and the
governors of the 19 national central banks of the euro-area countries. The Executive Board implements monetary policy in accordance with the
guidelines and decisions taken by the Governing Council, and comprises the president (currently Christine Lagarde), the vice-president and four
other members ‘selected from among persons of recognised reputation and experience in banking and money’ by the heads of state and
government of the EU.
Central Bank Targets And Operations: The ECB operates an inflation-targeting regime with the primary objective of maintaining price stability,
which was originally defined as an inflation rate close to, but below, 2.0% over the medium term. However, on July 8 2021, the ECB announced it
would abandon the ‘close to but below 2.0%’ inflation target in favour of a symmetric target, meaning that negative and positive deviations of
inflation from this target are equally undesirable. The ECB also committed to undertaking especially forceful easing measures when interest rates
are at the effective lower bound, which Lagarde has indicated they are now.
The ECB pursues its mandate by directly controlling three interest rates: the main refinancing rate, the deposit facility rate (the depo) and the
marginal lending facility rate. To achieve its objective, the ECB has at its disposal three instruments of monetary policy: open market operations, the
standing facilities of national central banks and minimum reserve requirements. Since the global financial crisis, the ECB has also engaged in large-
scale asset purchase operations, including under its Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme. The
monetary policy decisions taken by the ECB are then implemented by the national banks, which are responsible for carrying out open market
operations in the individual countries.
Inflation Around Target Over Long Term

Eurozone – Harmonised Index Consumer Prices, % chg y-o-y (1999-2031)
Historically, the main refinancing rate (so called refi rate) has been the most important of the three interest rates directly controlled by the ECB and
represents its policy rate. It is the rate that banks pay to borrow funds from the ECB for one week under a repurchase agreement. However, since
the launch of the ECB’s APP in 2015, which resulted in significant excess liquidity within the Eurosytem as the ECB swapped newly created bank
reserves for eligible debt securities, the refi rate has been of secondary importance. Instead, money market rates track the depo, which is the
interest paid by the ECB on excess reserves held by commercial banks. Since 2019, a tiering system has been in place to reduce the amount of
reserves that are remunerated at the depo rate (which is negative) in order to safeguard bank profitability.
Inflation Credibility: The ECB does not have a strong track record of controlling inflation as inflation has undershot its 2.0% target since 1999.
Consumer price growth averaged 1.6% over the last two decades, which is below the bank's overall inflation targeting objective (see chart below).
Housing, Food Take Up Large Share Of Spending

Eurozone - Harmonised Index Of Consumer Prices Basket Weights, %
In particular, the ECB has struggled with extremely low and occasionally deflationary conditions in the aftermath of the global financial crisis in
2008-2009, the eurozone sovereign debt crisis in 2010-2012, and the Covid-19 crisis in 2020. As the bank's inflation target is asymmetric
(ie, below target is regarded equally to above target inflation), this presents a significant challenge for the authorities. However, within the context
of a global deflationary environment, the damage to the ECB's inflation-targeting credentials has been minimal. Furthermore, 20 years are not
enough to thoroughly assess the behaviour and performance of the ECB, which should be measured against a significantly longer time horizon.
The US Federal Reserve, for example, was established in 1913, and the Bank of England in 1694.
MONETARY POLICY FORECASTS (EUROZONE 2021-2026)

Geography Indicator 2021 2022f 2023f 2024f 2025f 2026f
Eurozone Consumer price inflation, % y-o-y, eop 5.0 9.3 2.0 2.0 2.0 2.0
Eurozone Consumer price inflation, % y-o-y, ave 2.6 8.0 5.0 1.6 2.0 2.0
Eurozone Central bank policy rate, % eop 0.00 1.75 1.75 1.75 1.75 1.75
MONETARY POLICY FORECASTS (EUROZONE 2027-2031)
Geography Indicator 2027f 2028f 2029f 2030f 2031f
Eurozone Consumer price inflation, % y-o-y, eop 2.0 2.0 2.0 2.0 2.0
Eurozone Consumer price inflation, % y-o-y, ave 2.0 2.0 2.0 2.0 2.0
Eurozone Central bank policy rate, % eop 1.75 1.75 1.75 1.75 1.75
Fiscal Policy And Public Debt Outlook
Serious Italian Fiscal Consolidation Efforts Likely To Be Delayed To 2024

Key View
• We continue to expect that the Italian budget deficit will narrow from 7.2% of GDP in 2021 to 5.5% in 2022.
• Driving the improvement this year will be the unwinding of Covid-related spending and strong revenue growth linked to robust nominal
economic activity, though this will be partially offset by the introduction of measures aimed at minimising the impact from high inflation on the
private sector.
• We now anticipate that the budget deficit will hold at 5.5% in 2023 (previously 4.5%), given the weakening outlook for the Italian economy and
due to our view that cost of living relief measures will largely be sustained into 2023.
We continue to expect that the Italian budget deficit will narrow from 7.2% of GDP in 2021 to 5.5% in 2022, which compares to the
government’s own forecast of 5.6% and a Bloomberg consensus projection of 5.8%. Since we last updated our forecasts, we received
data for Q122 which showed the Italian budget deficit narrowing to 9.0% of GDP (not seasonally adjusted). This marked an improvement from
12.8% in Q121 and a pre-pandemic level of 6.5% in the same quarter of 2019. The improvement in the public finances was largely driven by a
strong tax take linked to the Italian economy’s robust rebound from the pandemic, though a rollback of Covid-19 expenditure also played an
important role.
Italian Budget Deficit To Remain Wide

Italy - Government Spending & Revenue, % of GDP
We expect that fiscal support aimed at shielding the private sector from high energy prices will see the government expenditure-
to-GDP ratio fall back only modestly to 55.0% in 2022 from 55.5% in 2021, which compares to 48.5% in 2019. Amid Europe’s ongoing
energy crisis, the government has so far committed resources worth around EUR50bn (or roughly 2.5% of GDP) as part of its effort to tackle the
cost of living crisis, having most recently approved an aid package worth EUR17bn in early August (see table below). With energy prices continuing
to push higher in recent weeks as concerns surrounding European energy security abound, there is significant scope for further measures to be
announced later over H222 that could push the Italian budget deficit to above 6.0% of GDP.
FURTHER AID MEASURES APPROVED IN AUGUST

Measure Cost
Transport Bonus Fund Refinanced EUR0.1bn
Aid To Municipalities To Cope With Higher Energy Costs EUR0.4bn
Extend Cut VAT Rate Applied To Gas Bills From 22% To 5% Until December And A 30% Reduction In Fuel Duty Until September 20 EUR1.1bn
Reduction In Tax Wedge For Workers Earnings Less Than EUR35,000 EUR1.2bn
Pension Valourisation EUR1.5bn
Tax Credits For Businesses EUR3bn
Extension Of EUR200 Bonus To Low And Middle-Income Italians EUR5bn
Additional Tax Relief On Energy Bills EUR5bn
Source: Corriere Della Sera, Fitch Solutions
Higher public investment will also keep expenditure elevated this year, though the impact on the public finances should be
broadly neutral as it will largely be funded via the Next Generation EU (NGEU) recovery fund. The government has indicated that it will
spend EUR42bn under NGEU, which includes EUR14bn left over from 2021 and the EUR28bn earmarked in Italy’s Recovery and Resilience plan for
2022. On the revenue side, Italy has received roughly EUR46bn so far, has applied for an additional EUR21bn based on reforms implemented in
the year-to-June and is expected to apply later this year for a further EUR19bn on the basis of reforms that will be carried out over H222. Following
the collapse of the Mario Draghi-led government of national unity, concerns rose that this last tranche would be endangered. However, we note
that in its caretaker capacity the government is continuing with its efforts to push through the reform agenda, with the Council of Ministers having
recently approved a decree aimed at speeding up the judicial process.
Implementation Of Italy's Recovery And Resilience Plan To Boost Spending And Revenues
Italy - Timeline For Distribution Of NGEU Funds, EURbn (LHC) & Timeline For Reforms (RHC)
Note: Milestones refer to qualitative goals, targets refer to quantitative goals. Source: European Commission, Fitch Solutions
Transfer under Next Generation EU will see the government revenue-to-GDP ratio hold well above its pre-pandemic level of 45.1%
at 49.5% in 2022, which compares to 48.3% in 2021. A further tailwind will relate to the notable tightening of labour market conditions as the
pandemic has eased, with the unemployment rate dropping to a fresh decade low of 8.1% in June 2022. This will boost government revenues
directly via a larger income tax take and indirectly via increased turnover taxes, with the latter also benefitting from persistently elevated inflation.
These positive trends will help to offset a revenue shortfall worth around EUR9bn, as a 25% windfall tax on energy companies aimed at financing
some of the cost of living supports introduced in 2022 has raised less than was previously envisaged.
Budget Deficit Unlikely To Narrow In 2023
Turning to 2023, we expect that the Italian budget deficit will remain wide at 5.5% of GDP. This represents a significant revision relative
to our prior 4.5% projection, reflecting our expectation that Europe’s energy crisis will persist into H123 and that this will drag the Italian economy
into recession. The impact from automatic stabilisers kicking in will see government expenditure rise, while weaker growth will weigh on revenues.
Further headwinds to fiscal consolidation efforts will relate to the uprating of spending that is indexed to inflation, while we also anticipate that
many of the cost of living supports introduced this year will be extended in order to mitigate social stability risks. Debt financing costs will tick
marginally higher as the European Central Bank continues with its tightening cycle, but we note that pass through will take some time given the
average weighted maturity of outstanding Italian public debt currently stands at around seven years.
Elevated Debt Load And Rising Bond Yields To Keep Future Right-Wing Government In Check
Selected Countries - Debt-To-GDP, % (LHC) & 10-Year Bond Yields, %
f = Fitch Solutions forecast. Source: Bloomberg, Eurostat, Fitch Solutions
Italy’s upcoming elections on September 25 are further clouding the outlook, with there being a strong likelihood that a
provisional budget will be required during the early part of 2023. Our core view is that a centre-right coalition government comprised of
the Brothers of Italy, Lega and Forza Italia will win a comfortable majority. Investors have long feared such an outcome, given the Brothers of Italy
and the League have previously voiced support for fiscal policies that could bring Italy into conflict with the European Commission. However, after
initially selling off after the collapse of the Draghi government, Italian government debt has stabilised as the right has adopted less alarmist fiscal
positions. Constrained by a high debt load and Italians’ newfound support for European institutions following the launch of the Next Generation EU
recovery fund of which Italy is a key beneficiary, we do not anticipate that the bloc’s actions will differ significantly from its current rhetoric when it
enters office.
Structural Fiscal Position

Italy's public finances deteriorated significantly on the impact of the pandemic in 2020, with the budget deficit widening from a 12-year low of
1.5% of GDP in 2019 to 9.6% as the government ramped up health expenditure and rolled out subsidies for both households and businesses. This
in turn saw the debt-to-GDP rise from an already elevated 134.3% in 2019 to 155.6% in 2020.
The budget deficit narrowed, but remained wide at 7.2% in 2021, and we anticipate a relatively slow process of fiscal consolidation in the coming
years as the government has indicated it will avoid implementing austerity measures. Instead, the Mario Draghi administration has signalled that it
will seek to drive an improvement in budgetary and debt metrics via growth, that will in turn be boosted by an ambitious public investment plan
backed by inflows of EUR192bn of EU funds (EUR68.9bn in grants and EUR122.6bn in loans) under the Next Generation EU programme. The
improvement in the public finances will be further delayed by the provision of support measures aimed at shielding the private sector from
Europe's energy crisis.
The trend of a wider budget deficit for longer is in marked contrast to the aftermath of the Global Financial Crisis, when Italy attempted to restore
the public finances to a sound footing via austerity measures, which the electorate reacted negatively to. The latest approach is reflective of a
broader shift in macroeconomic thinking back toward Keynesianism, that in turn has been made possible by an easing (albeit temporarily) of the
EU's fiscal rules.
Government Debt: Italy's government debt as a share of GDP was registered at 155.6% of GDP in 2020, the second highest in the eurozone after
Greece. The combined impact from a drop in GDP on the onset of the pandemic and the rollout of fiscal support measures saw the debt ratio rise
from an already elevated 134.3% in 2019. Italy's high debt ratio before the pandemic reflected the impact of fiscal profligacy prior to Italy joining
the euro in 1999, with the government having effectively run a primary surplus since then, and sluggish GDP growth.
Given our more upbeat view on the prospect for Italian GDP growth over the 2020s relative to the 2010s, we anticipate that the debt-to-GDP ratio
will gradually trend lower. That said, the extent of the improvement will be held back by persistently wide budget deficits, with the ratio unlikely to
fall below 130% over our forecast horizon. Nonetheless, the ECB's interventionist stance means that we see limited risk of a re-run of the eurozone
debt crisis, despite ongoing questions surrounding debt sustainability.
Public Sector Deb To Remain High, But Gradually Decline

Italy - Gross Debt & Fiscal Balance (2011-2031)
Fiscal Balance: As mentioned above, the government has indicated that an expansionary fiscal position will be maintained in the coming years,
with the administration aiming to improve fiscal metrics via growth and also seeking to prevent scarring effects from Europe's energy crisis. Rather
than seeking to cut spending and raise taxes, the government is instead planning to boost growth via an ambitious EUR250bn national recovery
programme. As such, what declines we do expect to see in relation to government expenditure in the coming years will be limited to the winding
down of temporary Covid-related spending.
While the deficit is likely to remain wider than the 3.0% of GDP mandated by the Stability and Growth Pact (rules currently suspended), outgoing
Prime Minister Draghi has indicated he views these targets as obsolete in the current macroeconomic climate and his comments have been met
with little pushback by the EC. Italy's centre-right, who are likely to return to power following September's election after an 11-year absence, have
also indicated that they believe these rules require reforming. However, they have indicated that they will abide by the rules that are reinstated,
suggesting that the risk of clashes with Brussels over fiscal policy of the sort that we have seen Italian governments engage in previously are
overstated.
Looking to the longer term, as elsewhere we anticipate that the pressure from adverse on demographics will see health and pension related
expenditure account for a larger proportion of total government spending. Low fertility rates and an increase in life expectancy pose challenges to
longer-term sustainability, but these challenges are by no means unique to Italy.
Government Spending's Share Of GDP To Revert Back To Trend

Italy - Government Spending & Revenue (2011-2031)
MAIN REVENUE AND EXPENDITURE CATEGORIES

Main Sources Of Expenditure % Of Total Main Sources Of Revenue % Of Total
Social protection 43.5 Current taxes on income, wealth, etc 31.0
General public services 15.3 Taxes on production and imports 30.3
Health 14.0 Social contributions 28.5
Economic affairs 8.3 Other 7.9
Education 8.0 Property income 2.1
FISCAL AND PUBLIC DEBT FORECASTS (ITALY 2020-2025)

Indicator 2020 2021 2022f 2023f 2024f 2025f
Total revenue, EURbn 785.4 857.6 976.0 1,008.8 1,030.4 1,054.3
Total revenue, EUR, % y-o-y -6.9 9.2 13.8 3.4 2.1 2.3
Total expenditure, EURbn 944.4 986.0 1,084.5 1,122.0 1,104.7 1,120.2
Total expenditure, EUR, % y-o-y 8.4 4.4 10.0 3.5 -1.5 1.4
Budget balance, EURbn -159.0 -128.3 -108.4 -113.2 -74.4 -65.9
Budget balance, % of GDP -9.6 -7.2 -5.5 -5.5 -3.5 -3.0
Total government debt, EURbn 2,573.5 2,679.0 2,848.8 2,976.8 3,051.2 3,117.1
Total government debt, % of GDP 155.6 150.4 145.0 144.0 143.6 141.9
FISCAL AND PUBLIC DEBT FORECASTS (ITALY 2026-2031)
Total revenue, EURbn 1,078.6 1,115.2 1,152.9 1,191.9 1,232.3 1,273.9
Total revenue, EUR, % y-o-y 2.3 3.4 3.4 3.4 3.4 3.4
Total expenditure, EURbn 1,146.8 1,185.6 1,225.7 1,267.2 1,310.1 1,354.4
Total expenditure, EUR, % y-o-y 2.4 3.4 3.4 3.4 3.4 3.4
Budget balance, EURbn -68.1 -70.4 -72.8 -75.3 -77.8 -80.5
Total government debt, EURbn 3,185.2 3,255.6 3,328.4 3,403.7 3,481.5 3,562.0
Total government debt, % of GDP 140.3 138.7 137.1 135.6 134.2 132.8
Currency Forecast
Euro To Trade Weaker For Longer

EURO CURRENCY FORECAST
2021 Spot 2022 2023
USD/EUR, ave 1.18 1.02 1.06 1.09
USD/EUR, eop 1.13 1.02 1.05 1.10
ECB main refinancing rate, % 0.00 0.00 0.75 0.75
Source: Bloomberg, Fitch Solutions. Last updated: July 28 2022
Key View
• The EUR will remain under pressure over the short term, trading in a narrow range of USD0.98/EUR-USD1.05/EUR, weaker than the USD1.05/
EUR-USD1.10/EUR band we expected before.
• Longer than anticipated USD strength, rising recession and political risks in the eurozone, and a bearish technical picture underpin our
forecasts.
• Over the long term, the EUR's relative undervaluation, a weaker greenback and a rebound in economic activity amid increasing EU recovery
fund disbursals should support the common currency.
Short-Term Outlook (three-to-six months)
The short-term outlook for the EUR remains bearish. In the year to date, the common currency has lost 10.9% of its value against the USD,
and the unit is now trading at a 20-year low, close to parity against the greenback. Throughout the rest of 2022, we expect that the EUR will trade
in a narrow range of USD0.98/EUR-USD1.05/EUR, significantly weaker than the USD1.05/EUR-USD1.10/EUR band we anticipated at the time of
our last forecast. This more downbeat outlook for the EUR comes on the back of a weak technical picture, persisting USD strength and rising
recession and political risks in the eurozone.
Positioning Suggests Euro Could Face Further Downside

Exchange Rate, USD/EUR (LHC) & Exchange Rate, USD/EUR & Net Speculative EUR Positions, Weekly (RHC)
The technical picture for the common currency remains downbeat. Earlier in July 2022, the EUR hit parity against the USD, and we believe
that the unit could eventually break below this psychologically important level if support at USD1.00/EUR is breached. Net speculative EUR-USD
short positions also suggest that option traders still have room to build up their short positions. For instance, during the height of the US-Mainland
China trade war in 2019, the market was significantly shorter on the euro (see right-hand chart above), which suggests that the unit could weaken
further. In a worst-case scenario, a move to USD0.90/EUR could be on the cards.
More Hawkish Fed To Keep Euro On The Backfoot

Select Economies – USD-EUR Two-Year Yield Spread, % & Exchange Rate, USD/EUR (RHC)
USD strength may persist for longer than we originally anticipated. Previously, our forecast for the EUR was predicated on the assumption
that the common currency would strengthen once USD strength eased in H222, but we now believe that the greenback might only peak later in
H222, and possibly as late as Q422-Q123. This slightly more bullish outlook for the USD reflects more hawkish market pricing of the US Federal
Reserve (Fed) funds rate and a safe haven bid for the greenback given the more uncertain economic environment. Futures markets now project
the Fed funds rate to end 2022 at 3.25%, whereas markets have been pricing out more aggressive hikes by the the European Central Bank (ECB’s)
as the eurozone’s economic outlook has deteriorated. The ECB’s main deposit facility is therefore priced to end the year at a lower 1.50%,
supporting EUR-USD yield spreads in favour of the greenback (see chart above).
Gas Prices To Keep Euro Under Pressure

Exchange Rate, USD/EUR & Natural Gas Price
Rising recession and political risks will also weigh on investor sentiment towards the EUR. At Fitch Solutions, we now attach a 45-50%
probability to the likelihood that the eurozone could enter a recession end-2022 as the threat of a potential Russian gas supply cut has
significantly increased over the past couple of months, resulting in soaring wholesale power prices. On July 25 2022, Gazprom announced that it
would further cut exports of natural gas to Europe via the Nord Stream 1 pipeline to 20% of capacity. This announcement prompted the EU’s
energy ministers to agree to cut gas consumption by 15% between August 1 2022 and March 31 2023. Further rationing cannot be ruled out,
which will continue to fuel bearish investor sentiment towards the EUR. On the political front, uncertainty surrounding the composition of the next
Italian government following Prime Minister Mario Draghi’s resignation will also keep investors wary of Italian debt, stoking EUR-related risk-off
sentiment. The launch of the ECB’s ‘Transmission Protection Instrument’ has done little to reduce these fears to date, with investors concerned
about the number of conditions attached to the tool.
Long-Term Outlook (six-to-24 months)
We see some upside for the EUR over the long term, expecting the unit to average USD1.10/EUR (from USD1.15/EUR) in 2023, compared to
USD1.06/EUR in 2022 (from USD1.10/EUR). This outlook rests on the assumption that the USD will weaken over the coming quarters once risk
appetite picks up as geopolitical and recession risks fade and investors begin to reposition their portfolios to a potential shift towards more dovish
rhetoric by the Fed. Further upside for the EUR will also stem from a recovery in eurozone economic activity as exports in the region should be
bolstered by the US avoiding a recession, improving terms of trade amid moderating energy prices, rebounding economic activity in China and
greater infrastructure spending amid a significant uptick in Next Generation EU (NGEU) fund disbursements in 2023. The largest portion of grants
used to fund the NGEU’s centrepiece Recovery and Resilience Facility will be disbursed in 2023 and 2024 (EUR74bn and EUR83.0bn respectively).
Euro Valuation Provides Scope For Upside

Eurozone – Real Effective Exchange Rate Index
Meanwhile, the EUR also has room to appreciate from a valuation perspective. The single currency’s real effective exchange rate currently trades
2.4% below its 10-year average, with the USD still overvalued by about 14.3% according to the same metric.
Risks To Outlook
Risks are tilted towards a weaker EUR than we currently expect. Though not our core view, a complete halt of Russian gas supplies to Europe would
push the eurozone into a deep recession, weighing on sentiment and demand for EUR-denominated assets. A decisive and lasting break below
parity would likely be the result of such a scenario.
10-Year Forecasts
Major Macroeconomic Challenges Ahead

Key View: We expect that the Italian economy will experience solid growth over the coming decade, with the economy projected to expand by an
average of 1.4% per annum from 2024 to 2031 after a brief recession commencing in Q422 linked to Europe's ongoing energy crisis. This would
imply a significant stronger outturn for growth than in the 2010s, with our more upbeat assessment of future growth prospects reflecting our
belief that we will not see a re-run of the eurozone debt crisis and our expectation that the reform agenda implemented following the pandemic
will support productivity growth.
We expect that the Italian economy will experience solid growth over the coming decade, with the economy projected to expand by an average of
1.4% per annum after a brief recession commencing in Q422 linked to Europe's ongoing energy crisis. If realised, this would compare favourably to
the sluggish 0.3% average annual rate observed in the 2010s, when activity was held back by fiscal sustainability concerns, political instability and a
gradually deteriorating outlook for global trade. Central to our more upbeat forecasts is our core belief that we will not seen a repeat of the
eurozone debt crisis, reflecting the European Central Bank (ECB's) commitment to preventing the fragmentation of the European sovereign debt
market and the EC’s less hawkish stance on fiscal policy.
No Return To The Sluggish Growth Of The 2010s

Italy - Real GDP Growth
We also see scope for the resilience and recovery plan drawn up by the outgoing government of national unity, headed by technocrat and former
ECB president Mario Draghi, to lift Italy’s long-run growth rate both through the process of capital deepening and by raising productivity after years
of anaemic growth. With respect to the former, fixed investment was constrained through the 2010s by a combination of limited fiscal space which
held back government capital expenditure and by weakness in the banking sector. Productivity issues have plagued the country for decades and
reflect an unfriendly business operating environment and a rigid and costly labour market.
The Draghi administration plans to tackle these issues using a two-pronged approach. On the expenditure side, the government intends on
investing around EUR250bn (roughly 12% of 2019 GDP) between 2021 and 2027 using a combination of EU loans and grants and modest
borrowing (EUR30bn) on international capital markets. Examples of how these funds will be spent include:
• Aiding the green transition through investing in high-speed rail networks and zero-emission public transport infrastructure, as well as
retrofitting residential buildings (EUR44bn).
• Improving Italy’s digital capabilities through boosting 5G coverage, digitalising public services and promoting the uptake of digital technologies
by businesses (EUR27bn).
• Pursuing active labour-market policies and investing in the apprenticeship system (EUR26bn).
• Enhancing the quality of the public health care service by increasing the use of telemedicine and investing in hospital equipment (EUR16bn).
The second leg of the programme will see the government implement reforms recommended by the EC as part of the European Semester in
2019 in order to obtain EUR191.5 of grants and loans from the Next Generation EU programme. These reforms are aimed at simplifying the tax
code, streamlining the judicial process, enhancing competition in the private sector and increasing transparency with respect to the reward of
state concessions, as well as improving hiring practices in the public sector. The government has also begun the process of reforming the pension
system, though the latest proposals would involve only a temporary fix.
Adverse Demographics To Weigh On Italian GDP Growth

Selected Economics - Projected Old Age Dependency Ratios, %
Source: OECD, Fitch Solutions
We anticipate that the implementation of the national recovery plan will help to offset the downside impact on growth from adverse
demographics. Italy has an ageing population profile and a growing dependency rate. The age dependency ratio (those aged over 65 as a
percentage of the working population) is set to reach 44.5% by end-2031, from 22% in 1990, per OECD forecasts. A shrinking workforce and a
higher degree of dependency will require a significant improvement in productivity or higher immigration of young workers to prevent a long-term
deterioration in economic output.
Risks To The Outlook
In addition to near-term headwinds related to the potential persistence of the pandemic, supply chain pressures and elevated price pressures, the
following pose significant downside to our longer-term outlook.
1. The Draghi administration opted to front-load reforms in 2021 and 2022. We believe that this was an acknowledgement that commitment to
the reform agenda will wane over the course of 2022 as tensions between the coalition parties rise as they prepared for parliamentary elections.
These concerns proved well founded, with the government of national unity splitting in mid-July and early elections now pencilled in for
September 25. The likely incoming right-wing coalition government comprised of the far-right Lega and Brothers of Italy, as well as ex-Prime
Minister Silvio Berlusconi’s Forza Italia, has indicated that they will continue to abide by the reform leg of the RRP when in government. However,
owing to these parties' support for unconventional macroeconomic policies, we see significant risk of this coalition government rolling back the
Draghi reforms, a negative for productivity growth.
Italy's Staggering Debt Pile Remains A Key Downside Threat To Growth

Selected Economies - Public Sector Debt-To-GDP, %
2. The government's long-term debt dynamics also provide serious cause for concern. With the eurozone’s second-largest debt-to-GDP ratio,
government borrowing costs could surge sharply over the longer term. This would not only eat away at government coffers, limiting resources
available for social spending, but would also elevate interest rates for the private sector. A structural increase in interest rates would discourage
investment and could significantly lower long-term economic growth. European Central Bank monetary easing has been a lifeline for Italy by
helping to stabilise the public debt load in the context of relatively weak growth and inflation. However, even in an optimistic scenario, Italy's public
debt load would remain above 130% of GDP over our 10-year forecast horizon to 2031, while any adverse shock to interest rates or growth could
quickly send debt levels spiralling again. These projections underpin our view that Italy is the biggest individual threat to eurozone stability among
member countries.
LONG-TERM MACROECONOMIC FORECASTS (ITALY 2022-2031)

Indicator 2022f 2023f 2024f 2025f 2026f 2027f 2028f 2029f 2030f 2031f
Nominal GDP, EURbn 1,971.8 2,058.7 2,124.5 2,196.4 2,270.8 2,347.7 2,427.2 2,509.3 2,594.2 2,682.0
Real GDP growth, % y-o-y 3.4 0.4 1.8 1.4 1.4 1.4 1.4 1.4 1.4 1.4
Population, mn 60.26 60.15 60.02 59.88 59.72 59.56 59.38 59.21 59.03 58.85
GDP per capita, EUR 32,719 34,227 35,396 36,682 38,023 39,420 40,872 42,381 43,946 45,570
Consumer price inflation, % y-o-y, ave 7.5 4.0 1.4 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Current account balance, % of GDP 0.4 1.0 1.2 1.1 1.0 0.9 0.8 0.8 0.7 0.6
Exchange rate EUR/USD, ave 0.94 0.91 0.88 0.85 0.81 0.80 0.80 0.80 0.80 0.80
f = Fitch Solutions forecasts. Source: Eurostat, Fitch Solutions
DISCLAIMER
Our long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most cases that growth eventually
converges to a long-term trend, with economic potential being determined by factors such as capital investment, demographics and productivity growth. Because quantitative
frameworks often fail to capture key dynamics behind long-term growth determinants, our forecasts also reflect analysts’ in-depth knowledge of subjective factors such as
institutional strength and political stability. We assess trends in the composition of the economy on a GDP by expenditure basis in order to determine the degree to which
private and government consumption, fixed investment and the export sector will drive growth in the future. Taken together, these factors feed into our projections for
exchange rates, external account balances and interest rates.
Source: Fitch Solutions
Political Outlook
Italy Election Preview: Risks Of Dramatic Policy Shifts Are Overstated

Key View
• A coalition of centre-right parties comprised of the Brothers of Italy, the Lega and Forza Italia will likely win a comfortable majority in Italian
parliamentary elections scheduled for September 25 2022, with this task made easier by the failure of the left to consolidate into a single bloc.
• While such a government will likely enjoy a more difficult relationship with the EU, concerns of a major clash are overstated with the centre-
right having moderated its euroscepticism tendencies.
• Fiscal risks are elevated, but the centre-right has moderated significantly some of its previous controversial policy proposals in recognition of
Italy’s vulnerable macro status and weak bargaining position with relation to the EU.
• We do not foresee a significant shift in Italy’s foreign policy stance in the coming years, though on social issues the government will move to a
more conservative position.
We at Fitch Solutions expect that a coalition of centre-right parties comprised of the Brothers of Italy (FdI), the Lega and Forza
Italia will win a comfortable majority in Italian parliamentary elections scheduled for September 25. We attach a 75% probability
to such an outcome. This has long been our view and informed our decision to revise lower Italy’s Short-Term Political Risk Index score to 66.5
(out of 100) following the collapse of the technocratic Prime Minister Mario Draghi’s government in July. As we outlined at the time, we believe the
electoral outcome will act to complicate the policy-making process in the years ahead, owing to the lack of a central authoritative figure like
Draghi, and this will ultimately heighten government instability.
Political Risk Picks Up In Italy, With Draghi Boost Proving Short-Lived

Italy - STPRI By Component (LHC) & STPRI Relative To Developed Markets (RHC)
There is precedent for infighting within Italy's right-wing bloc. Following the 2008 Italian general election, former prime minister Silvio Berlusconi’s
‘The People of Freedom’ party (a merger of Forza and the National Alliance, a predecessor of the FdI) formed a coalition with the then known
‘Northern League’ (now rebranded as Lega). Despite winning a significant majority in 2008, the government collapsed just three years later amid
infighting over the response to the Euro Debt Crisis in which Italy was then engulfed. Unlike 2008, Italy's next centre-right government will likely be
dominated by the FdI as the party has surged in the polls over the past two years, benefitting from its decision to not partake in the Draghi
government that has seen it attract the support of a significant proportion of Lega voters. However, the scope for infighting within the government
(and implied risks to government stability) will remain elevated given enduring tensions between party leaders in the centre-right bloc.
FdI Emerge As The Voice Of The Right

Italy - National Parliament Voting Intentions, %
Source: National Polling Agencies, Fitch Solutions
Chances of a centre-right bloc have strengthened in recent weeks as the centre-left has splintered, with three groupings
effectively competing for the same pool of voters. The largest of these is led by the Democratic Party (PD), which has teamed up with the
ideologically fringe More Europe, Civic Commitment and Greens and Left Alliance and is running on a moderate centre-left platform. The inclusion
of the Greens and Left Alliance - which in effect represented an attempt by the PD to swing further to the left to attract disaffected Five Star
Movement (MS5) voters - ultimately saw the small but influential Action party opt to disassociate itself from this electoral coalition, and it has
instead formed a centrist grouping with Italia Viva, led by former prime minister Matteo Renzi. This 'third pole' is polling at around 5% nationally.
Opposition's Failure To Consolidate Paves Way To A Centre-Right Government

Italy - Projected Vote Share, %
Source: National Polling Agencies, Fitch Solutions
Sitting apart from these two groupings is the MS5, which has traditionally sought to avoid left or right-wing labels but has shifted closer to the
former in recent years. Support for the MS5 has collapsed since it emerged as the largest party in the Italian Parliament in the 2018 election, with
the party itself having split over this period as it struggled to maintain its anti-establishment credentials when in office. The MS5 was originally
expected to run on a joint ticket with the PD, having done so at a local level on several occasions. However, the PD opted not to proceed with this
arrangement in response to the MS5’s role in collapsing the Draghi government. Current polling suggests that the MS5 will will win about 10% of
the vote, reflecting the support of certain unions and beneficiaries of the party's flagship citizenship income scheme.
Current Composition Of The Italian Parliament

Italy - Chamber of Deputies & Senate Share Of Seats By Party, %
Source: National Sources, Fitch Solutions
Electoral System
This year’s election will be the first since a referendum in 2020, which saw Italian citizens vote to reduce the size of the Chamber
of Deputies (lower house of parliament) from 630 to 400 seats and the Senate (upper house, same powers as Chamber of
Deputies) from 400 to 200 seats. While there had been some hope that changes to the electoral system that would increase proportionately
would accompany these reforms, these were not passed prior to the collapse of the Draghi government. As a result, Italy will go to the polls using
the same system as in 2018, with 221 seats (147 in the Chamber of Deputies and 74 in the Senate) determined in single member constituencies
using a ‘first past the post’ process. The remaining seats are decided in multi-member constituencies where proportional representation is
deployed, using a closed party list system. Owing to the centre left’s failure to consolidate, it is likely that the centre-right will win a large proportion
of the single-member constituencies, possibly as high as 90% according to some recent simulations.
Economic Backdrop Less Than Ideal
As when the centre-right last took office in 2008, the macro environment in Italy at present is challenging to say the least, with
the economy likely to enter recession this winter amid a severe energy crunch. Against this backdrop, the European Central Bank (ECB)
has commenced its tightening cycle, with the impact feeding through quicker in Italy where neutral rates of interest are lower. Italy’s macro
vulnerabilities have also worsened substantially since 2008, with attention largely focused on a debt-to-GDP ratio that has risen from an already
high 106.2% to 150.9% (figures for 2021) over this period. The Euro Debt Crisis of the early 2010s has meant that investors no longer treat all
eurozone sovereign debt as effectively equal. As a result, the Italian government now pays a spread of some 230 basis points (bps) on 10-year
money over the German equivalent even in spite of targeted ECB asset purchases, relative to 20bps in 2007/08.
Rising Bond Yields Amid A High Debt Load To Create A Challenge For The Next Government
Italy - Government Debt-To-GDP Ratio, % (LHC) & 10-Year Sovereign Bond Yield, %
f = Fitch Solutions forecast. Source: Bloomberg, Eurostat, Fitch Solutions
Outlook For Policy
We do not anticipate that economic policy will shift significantly under a centre-right coalition government, as Italy is constrained
by a heavy debt load in a rising rate environment and by a worsening economic outlook. The centre-right emphasises tax cuts in its
programme for government (see table further below) and official estimates put the cost of such measures at a hefty EUR80bn (4% of GDP).
However, we note that these initiatives have been significantly watered down relative to what the right has previously proposed. Its ability to deliver
on these campaign promises and continue to shield the private sector from the energy crisis (while avoiding the attention of the European
Commission) is likely to prove limited. Granted, the centre-right has not previously shied away from such battles, but in our view increased support
for the EU in Italy - in part due to the establishment of the Next Generation EU recovery fund - means that there is less to be gained from clashes
with Brussels than in the heyday of euroscepticism in the 2010s.
The centre-right will be less constrained on social issues, with its programme for government indicating a shift to a more conservative stance on
issues such as law and order, as well as immigration. One other eye-catching policy relates to the FdI’s proposal for the direct election of Italy’s
president. This could help to reduce government instability (a perennial issue in Italy), as under the proposal parliament could only force the
resignation of a presidentially appointed government through voting in an alternative coalition (as is the case in Germany). However, critics have
argued it would act to undermine the democratic process. In any case such a reform would require a change to the constitution that can only be
achieved through a referendum, unless the government has a two-thirds majority which current polling suggests is unlikely.
Fiscal Risks Present, But Somewhat Overstated
The prospect of a right-wing government has sparked some fear on financial markets as the right in Italy has not always seen eye-
to-eye with the European Commission, particularly with respect to fiscal policy. The Lega’s last stint in power between 2017 and 2019
was marked by a series of clashes over Italy’s adherence to the EU’s fiscal rules that prompted significant volatility in Italian BTPs. The FdI has
adopted similarly hostile rhetoric in the past, joining the Lega in questioning whether Italy should leave the eurozone. The FdI were fierce critics of
Draghi’s EUR220bn Recovery and Resilience plan (of which EUR192bn will come from the EU), while the Lega and Forza Italia were responsible for
slowing the progress of associated structural reforms (such as the mandatory digital invoice system) through the Italian parliament in H122 that
are required to access the EU funds.
Italian Bond Yields Highly Sensitive To Political Newsflow

Italy - 10-Year BTP Yield, %
While investor concerns are understandable and we cannot rule out the potential for future clashes with the EU, we believe these
fears are somewhat overdone. The FdI and Lega have dialled back their euroscepticism in recent years as the Italian public’s perception of the
EU has improved. The leader of the FdI, Giorgia Meloni, in particular has repeatedly insisted in recent weeks as her party has edged closer to power
that it will comply with the EU’s currently suspended fiscal rules, though it will seek to loosen these rules as part of the planned EU-wide overhaul.
Meloni has also confirmed that her party would proceed with the reform leg of Recovery and Resilience plan if elected, though it would look to
adjust some of the spending initiatives.
Access To EU Funding Contingent On Completion Of Significant Structural Reforms

Italy - Timeline For Distribution Of NGEU Funds, EURbn (LHC) & Timeline For Reforms (RHC)
Note: Milestones refer to qualitative goals, targets refer to quantitative goals. Source: European Commission, Fitch Solutions
The centre-right’s more conciliatory tone also likely reflects an acknowledgement that the EU holds the majority of the cards, as a clash with
Brussels would likely see Italian BTPs come under severe downward pressure. Granted, this did not stop the Lega previously, but this was prior to
the launch of the EU recovery fund, from which Italy can receive EUR68.9bn in grants and EUR122.6bn in preferential loans by 2026. Added to this,
compliance with both the fiscal rules and the reform agenda is now in effect a prerequisite for Italy to benefit from usage of the ECB’s Transmission
Protection Instrument aimed at preventing a fragmentation of the eurozone debt market. While we doubt this tool will ever be used, fears that Italy
would not be eligible for inclusion due to fiscal policy choices could see BTPs sell off sharply and the prospect of such a development should act to
further constrain the government.
No Shift In Stance Toward Russia-Ukraine Likely
In addition to relations with the EU, much has been made of the relationship between the centre-right and Russia, with leaders of
the Lega Matteo Salvini and Forza Italia Silvio Berlusconi having previously enjoyed seemingly close ties with Russian President
Vladimir Putin (particularly the latter). Some commentators have suggested that this could result in Italy seeking to undermine Western
efforts to sanction Russia, with Italy’s heavy reliance on Russian natural gas exports (10% of total Italian energy consumption) acting as a further
inducement. The FdI’s strong Atlanticist stance, however, stands out as a significant counterweight to its partners’ Russian sympathies, with the FdI
supporting the Draghi government in voting for sanctions on Russia following its invasion of Ukraine.
KEY POLICY PROPOSALS
Centre-Right Democratic Party (Centre-Left)
Tax 1. Reduction of the tax burden for families, businesses and self-employed 1. Tax cuts on labour to give workers an extra month salary
workers
2. Introduction of a tax amnesty
2. Zero contributions for the permanent hiring of those aged under
35
3. Extension of the flat tax for self-employed workers to those earning less
than EUR100,000 from EUR65,000 now
Government 1. Full use of Recovery Fund resources, with a focus on modernising Italy's 1. No changes to the Recovery and Resilience Plan
spending infrastructure
2. Reduce retirement age to 63
2. Increase to the size of the minimum pension
3. Construction of 500,000 social housing units over the next 10
3. Replacement of the citizenship income with more targeted measures years
Foreign affairs 1. Compliance with NATO commitments, including the continuation of 1. Focus on a common European army
support for Ukraine
2. EU enlargement in the Balkans
2. Full adherence to the process of European Integration
Social issues 1. Support for the family and the birth rate through tax and spend initiatives 1. Introduction of a minimum wage
2. Clampdown on both crime and illegal immigration 2. Lump sum bursary worth EUR10,000 to those from qualifying
income backgrounds
3. Loosening of immigration restrictions
Administrative 1. Direct Election of the President of the Republic 1. New electoral law
issues
Energy 1. Reduction of VAT on energy products 1. Green tax reform that promotes related investment by businesses
and households
2. Support for price-cap policies at an EU level
2. Construction of new renewable parks aimed at creating 470,000
jobs in 10 years
3. Increasing domestic electricity production, which includes an evaluation
of nuclear power
3. Continuation of temporary and national energy price caps
Alternative Electoral Scenarios
In terms of alternative electoral scenarios, as mapped out above we attach a low probability to other outcomes given current
polling. In the absence of a pre-electoral tie-up between the PD and MS5, we see a roughly 10% chance of a centre-left led government, which
would result in a broad continuation of the Draghi agenda, albeit with a somewhat greater focus on initiatives aimed at improving Italy’s social
infrastructure. Similarly, we believe that there is a 15% probability that the centre-right underperforms in the election and is required to lean on the
support of the centrist grouping in order to form a working majority in parliament. This outcome would help to curb the right’s excesses, though it
remains unclear whether either Action or Italia Viva would partake in such a government given the criticism they have previously aimed at both
the FdI and the Lega due to their eurosceptic leanings and the latter's association with Italy's fascist past.
Long-Term Political Outlook
Fiscal Adjustments And Demographic Ageing To Dominate Italy's Long-Term Political

Outlook
Key View
• Italy’s current and future governments, regardless of political ideology, will face mounting challenges from fiscal readjustments amid a rapidly
ageing population, calls for structural economic reforms, and demands for a tougher stance on immigration.
• We also cannot preclude a major reassessment of Italy’s position within the eurozone and EU over the coming decade, especially if the country
experiences a new financial crisis and looks for ‘radical’ solutions.
Italy’s political outlook over the coming decade will be dominated by debates over the desirability of continuing with the outgoing Draghi
administration's liberalising economic reforms, how best to cope with a rapidly ageing population, how much immigration the country should
allow, and the relationship between Italy and the eurozone and the EU. Although these debates are already taking place in Italy and other EU
members, Italy will have to deal with them from a weaker economic position, as the country’s real GDP growth has underperformed regional peers
since the 2000s, its demographic profile is poorer, and its debt-to-GDP ratio, at about 150% (as of end-2021), is considerably higher. A failure to
tackle these issues effectively, with potential for the reform agenda following parliamentary elections in September, could exacerbate existing
socio-economic stresses, leading to growing calls for more dramatic policy responses, such as Italy’s departure from the eurozone and/or the EU.
Challenges And Threats To Stability And Governance
Government Instability: Italy has been characterised by rapid changes of governments, with very few serving out their full five-year terms. This
frequent turnover reflects the fragmented nature of the legislature, and the fact that the upper house (Senate) is almost equally as powerful as the
lower house, which is highly unusual and has led to deadlock. Former prime minister Matteo Renzi (2014-2016), a reformer, attempted to resolve
this through a constitutional referendum in December 2016, but voters rejected the planned changes, prompting Renzi’s resignation. The Five Star
Movement (M5S)-League (LN, rebranded from Northern League in 2018) populist coalition that took power after the March 2018 election had
strong divergences over policy, and collapsed in August 2018 as expected. The subsequent Five Star-Democratic Party coalition was closer on the
political spectrum, but with key differences in policy and collapsed in early 2021 as we expected. The current broad 'national unity' coalition under
ex-ECB President Mario Draghi benefitted from wide support and a strong majority, but even it collapsed in mid-July and prompted the early
elections that are scheduled for September 25.
High Levels Of Corruption And Organised Crime: Italy’s political scene is characterised by a high degree of corruption, and this is reflected by
Italy’s low score in Transparency International’s 2021 Corruption Perceptions Index, where it ranked 42nd out of 180 countries surveyed. Although
this was an improvement from 67th out of 178 countries in 2010, the 2021 figure was far below most other countries of a comparable level of
development. Corruption is problematic because it undermines public faith in political leaders and weakens the business environment. Criminal
organisations (Cosa Nostra, Camorra and 'Ndrangheta) represent a long-running problem that is unlikely to be completely resolved in the coming
decade despite plans to streamline the judicial system. Although significant progress has been made on the investigation and prosecution fronts,
the national government’s control of the territory in many Southern regions remains patchy. This, in turn, prevents significant investment from
flowing to the poorest regions of the country, while suffocating local small and medium sized enterprises. As part of the recovery and resilience
plan, the Italian government has signalled that it will aim to improve public hiring practices, which may weaken the relationship between the Mafia
and local administrators. However, criminal organisations are likely to remain strong given widespread poverty and rampant inequality in southern
regions.
High Levels of Unemployment: Italy’s unemployment rate has for many years been one of the highest among Western European countries,
reflecting chronically weak economic growth. Although Italy’s national unemployment figure stood at 8.8% in January 2022 down from a more
than 30-year high of 13% in November 2014, the average figure masks regional variation. The less developed ‘Mezzogiorno’ (Southern regions,
plus Sicily and Sardinia) has considerably higher jobless figures than the average. Employment rates remain low in these regions at circa 50%
relative to an already low national average of around 65%. Efforts are underway to boost labour force participation rates via active labour market
policies, but it is too early to determine their level of success.
On A Long-Term Declining Trend, But Still High

Italy - Unemployment, %
Source: ISTAT, Fitch Solutions
Ageing Population: Italy, like most European nations, is experiencing a rapidly ageing population, with the UN forecasting the proportion of
people aged 65 and above rising from 22.4% in 2015 to 28.5% by 2030 and 34.6% by 2050. These projections are comparable to those for Japan,
which is one of the most aged societies. The ageing of Italy’s population means that an increasing share of public expenditures will need to be
dedicated to elderly care and healthcare more broadly, and this may require increases in taxation or be accommodated via spending cuts in other
areas. Italy, like its EU peers, will probably need to further raise the retirement age, but this will lead to further tensions, especially if this makes it
harder for younger workers to join the workforce or progress in their careers.
Immigration And Mediterranean Security: Italy has experienced considerable immigration since the 2000s, and this has caused a major
political backlash, which has benefitted right-wing parties such as the Lega. Italy’s location on the Mediterranean means that it is likely to be the
first port of arrival in the EU for migrants coming from war-torn Libya or transiting through Libya or Tunisia from Saharan and Sub-Saharan Africa,
or the Middle East. There is no guarantee that North African states will not experience more upheaval or violence over the coming decade.
Although the arrival of new immigrants could benefit Italy over the long term by mitigating the effects of an ageing population, in the short-term
voters are far more concerned about the pressures exerted on Italy’s economic resources and the challenges of integrating new arrivals into Italian
society. For these reasons, Italy has been pressing the EU to share more of the burden of accommodating new migrants, and these issues will
persist in Rome-Brussels relations.
North-South Divide: Italy suffers a long-standing and pronounced divide between the prosperous northern regions and the relatively
underdeveloped south (‘Mezzogiorno’). In the past, this has fuelled separatist sentiment in the north among those fed up of subsidising the poorer
south. Although the Lega no longer advocates separatism, the regional divide will continue to affect Italy’s politics and necessitate fiscal transfers,
even though the central government in Rome is financially strained. Discontent with ‘politics as usual’ in the south was one reason why the anti-
establishment M5S performed so well in the south in the 2018 election. We anticipate that measures introduced by the Draghi government's
aimed at reducing this divide through heightened capital expenditure and the implementation of significant reforms will help to reduce this gap
somewhat in the coming years, though the extent of the improvement may be held back by a stall in the push for reforms over 2022 and due to a
shortage of capable public administrators in southern Italy.
A Clear North-South Divide

GDP Per Capita By Region, EUR'000s, 2015
Source: ISTAT, Fitch Solutions
Long-Term Political Risk Score
Italy scores 75.2 out of 100 in our Long-Term Political Risk Index. It scores 82.3 out of 100 for ‘characteristics of polity’, reflecting the country’s solid
democratic credentials, despite its economic weaknesses. Italy scores 85.0 for ‘characteristics of society’, reflecting broad social stability despite
economic adversity. The ‘scope of state’ score is lower at 75.0, reflecting the persistence of corruption compared to Western European peers, and
the external pressure being applied to Italy to rein in its public finances. Italy scores only 50.0 for ‘policy continuity’, reflecting the relatively frequent
changes of governments and their policies.
ITALY – POLITICAL OVERVIEW

System of Multi-party parliamentary democratic republic. Executive power rests with the Council of Ministers, led by the President of the Council. Legislative
government power is vested in parliament. The Italian parliament currently consists of a 630-seat lower house (Chamber of Deputies) and 315 seat upper house
(Senate of the Republic)
Head of state President of the Republic (currently Sergio Matarella), elected by both houses of parliament and 58 regional representatives for a seven-year term.
Head of Prime Minister Mario Draghi (caretaker), heading a coalition government since February 2021
government
Last election Parliamentary: March 4 2018
Presidential: January 24-29 2022
Composition of Broad coalition government comprising the Five Star Movement, the League, Democratic Party, Forza Italia and other smaller parties
current
government
Key figures Minister Of The Interior - Luciana Lamorgese; Minister of Foreign Affairs - Luigi Di Maio; Minister of Economy and Finance - Daniele Franco; Minister of
Economic Development - Giancarlo Giorgetti; Bank of Italy Governor - Ignazio Visco
Main political Five Star Movement (M5S): This anti-establishment party, created by former comic and actor Beppe Grillo, ran on a platform of populism, anti-
parties corruption, environmentalism and participatory democracy. Their success reflects growing disillusionment with austerity policies and the traditional
political elite.
League (formerly Lega Nord): Regionalist, right-wing populist. Formerly it advocated secession of the North, but in the 2018 elections it turned to
Italian nationalism with an anti-immigration and eurosceptic rhetoric.
Democratic Party: The Democratic Party is a pro-European party with green values, which also pushes for progressive taxation, influenced by social
democracy and the Christian left.
Brothers of Italy: Far-right eurosceptic party led by Giorgia Meloni, who formerly served as a member of ex-Prime Minister Silvio Berlusconi's cabinet.
Next election Parliamentary - September 25, 2022

Presidential - In or before 2029
Key relations/ Member of the EU, IMF, WTO, NATO and EBRD
treaties
Short-Term 66.5
Political Risk
Index score
Long-Term 75.2
Political Risk
Index score
Global Macro Outlook
Mixed Growth Outlook Amid Headwinds

We reduced our 2022 global growth forecast from 2.9% in July to 2.8% in August, and we remain slightly below Bloomberg consensus, which
comes in at 2.9%. This slower pace of growth for the global economy is primarily the result of a sharp downward revision to our US growth forecast
from 2.4% to 1.8% in 2022 on the back of two consecutive quarters of negative growth. Real GDP contracted by 0.9% q-o-q annualised in the US
in Q222, which following on from the 1.6% contraction in Q122, means that the economy fell into a technical recession. We also made downward
revisions to our growth forecasts for Belgium and Norway.
Real GDP growth surprised to the upside in Q222 in several eurozone economies which led to upward revisions to our forecasts in France (2.3% to
2.4%) and Italy (2.9% to 3.3%). We also made upward revisions to several other economies, including Mexico (1.5% to 2.0%), Colombia (4.6% to
5.6%), Singapore (3.0% to 3.5%), Indonesia (4.8% to 5.2%), the Philippines (6.2% to 6.6%), Malaysia (5.2% to 5.9%) and Algeria (3.0% to 3.4%). These
upward growth revisions helped to partially mitigate the negative impact from lower US growth on our global growth forecast (see chart below).
Growth Easing Slightly As US Forecast Revised Lower

Global - Real GDP Growth Forecasts, % & Various Q222 Quarter-On-Quarter Releases, %
Note: US is q-o-q annualised. Source: Bloomberg, Fitch Solutions
While the outlook for the global economy remains challenging, there have been three positive surprises over the past month,
which could lend support to the global economy over the very near term. First, inflation in the US may have peaked given that the year-on-year
rise in consumer prices eased from 9.1% y-o-y in June to 8.5% in July as upside pressure on energy prices and used car prices eased somewhat.
Although it is still too early to be sure whether inflation has in fact peaked, financial markets have responded positively, with a sharp rally in equity
prices and sharp easing of bond yields.
Has Inflation Finally Peaked Or Is It Still Too Early To Tell?

US – Headline & Core Inflation, % (LHC) & Sub-Components, pp contribution (RHC)
Second, according to the Citi Surprise Index, as global inflation data surprised to the downside, economic activity data have also started to surprise
to the upside, with the global economy likely also starting to benefit from the incipient cyclical recovery in Mainland Chinese growth.
Data Surprises Are Somewhat Positive Lately

Global - Citi Surprise Indices
Third, US corporate earnings growth remained positive on average in Q222 despite weak expectations and a sharp decline in earnings recorded for
financials and tech companies. With the exception of those two sectors, most other sectors recorded positive earnings growth, in particular energy
companies. As a result, analyst earnings revisions - which are typically quite volatile - have risen sharply in recent weeks after a prolonged decline
ahead of the Q2 earnings season.
Despite Slowing, Earnings Growth Came In Above Expectations

US - S&P 500 Earnings Per Share USD, % (LHC) & Citi Global Earnings Revision Index (RHC)
Despite these upside surprises, we do not expect to see a sharp cyclical pickup in global growth over the coming quarters given
multiple headwinds to the global economy. We continue to see elevated risks that the eurozone falls into a technical recession over the winter
period particularly as the current energy crisis in Europe is worsening, and we also see a rising probability that the US may experience a more
sustained contraction in 2023. Although we expect a cyclical recovery in Mainland Chinese growth over H222, we believe that it will be somewhat
tepid and susceptible to downside risks given rolling lockdowns and ongoing stress in the property sector.
GLOBAL - MACROECONOMIC FORECASTS (2019-2026)

2019 2020 2021 2022f 2023f 2024f 2025f 2026f
Real GDP Growth (%)
US 2.3 -3.4 5.7 1.8 1.6 1.9 2.0 2.0
Eurozone 1.6 -6.2 5.4 2.6 1.0 1.9 1.7 1.7
Japan -0.2 -4.5 1.7 1.8 1.3 1.0 1.0 0.9
China (Mainland) 6.0 2.3 8.1 3.6 5.5 5.4 5.3 5.2
World 2.6 -3.1 5.9 2.8 2.8 3.1 3.0 3.0
Consumer Inflation (avg)
US 1.8 1.2 4.7 7.7 3.7 2.5 2.3 2.3
Eurozone 1.2 0.3 2.6 8.0 3.5 1.8 2.0 2.0
Japan 0.5 0.0 -0.3 1.8 1.0 1.0 1.0 1.0
China (Mainland) 2.9 2.5 0.9 2.4 3.1 2.3 2.3 2.3
World 2.9 2.8 4.5 10.4 5.2 3.2 3.0 2.9
Interest Rates (eop)
Fed Funds Rate 1.75 0.25 0.25 3.25 3.25 2.50 2.50 2.50
ECB Refinancing Rate 0.00 0.00 0.00 1.25 1.25 1.25 1.25 1.25
Japan Overnight Call -0.10 -0.10 -0.10 -0.10 -0.10 0.00 0.00 0.00
Rate
Exchange Rates (avg)
USD/EUR 1.12 1.14 1.18 1.06 1.10 1.13 1.18 1.24
JPY/USD 109 107 110 128 124 117 114 114
CNY/USD 6.91 6.90 6.45 6.60 6.75 6.78 6.78 6.83
Oil Prices (avg)
OPEC basket (USD/bbl) 64.04 41.47 69.89 104.00 99.00 87.00 87.00 84.00
Brent crude (USD/bbl) 64.16 43.21 70.95 105.00 100.00 88.00 88.00 85.00
f = Fitch Solutions forecast. Source: Bloomberg, local sources, Fitch Solutions
GLOBAL AND REGIONAL - REAL GDP GROWTH AND EXCHANGE RATES (2019-2026)
Global & Regional Real GDP Growth, % chg y-o-y
2019 2020 2021 2022f 2023f 2024f 2025f 2026f
World 2.6 -3.1 5.9 2.8 2.8 3.1 3.0 3.0
Developed Markets 1.8 -4.4 5.2 2.3 1.5 1.9 1.9 1.9
Emerging Markets 3.7 -1.3 6.8 3.4 4.4 4.7 4.5 4.4
Asia (Ex-Japan) 5.4 0.3 7.4 4.4 5.5 5.5 5.4 5.4
Latin America 0.8 -6.6 6.7 2.0 2.0 2.3 2.4 2.4
Emerging Europe 2.7 -2.1 6.3 -3.9 1.7 4.1 2.9 2.9
Sub-Saharan Africa 2.8 -1.7 4.4 3.3 3.8 3.9 3.9 4.0
Middle East and North Africa 0.3 -3.1 5.6 6.4 4.6 4.0 3.8 3.7
Developed Market Exchange Rates
2019 2020 2021 2022f 2023f 2024f 2025f 2026f
Eurozone USD/EUR, ave 1.12 1.14 1.18 1.06 1.10 1.13 1.18 1.24
Japan JPY/USD, ave 109 107 110 128 124 117 114 114
Switzerland CHF/USD, ave 0.99 0.94 0.91 0.96 0.94 0.96 0.93 0.89
UK USD/GBP, ave 1.28 1.28 1.38 1.25 1.26 1.30 1.32 1.32
Emerging Market Exchange Rates
2019 2020 2021 2022f 2023f 2024f 2025f 2026f
China (Mainland) CNY/USD, ave 6.9 6.9 6.4 6.6 6.8 6.8 6.8 6.8
South Korea KRW/USD, ave 1,165 1,180 1,144 1,240 1,180 1,115 1,130 1,130
India INR/USD, ave 70.4 74.1 73.9 78.0 81.0 83.4 85.9 88.5
Brazil BRL/USD, ave 3.94 5.16 5.39 5.19 5.30 5.37 5.40 5.43
Mexico MXN/USD, ave 19.3 21.5 20.3 20.4 21.1 21.7 22.0 22.3
Russia RUB/USD, ave 64.7 72.1 73.7 68.5 75.0 80.0 87.0 81.0
Turkey TRY/USD, ave 5.7 7.0 8.9 16.4 16.1 14.5 13.3 12.8
South Africa ZAR/USD, ave 14.4 16.5 14.8 15.8 16.0 17.0 17.5 17.7
f = Fitch Solutions forecast. Source: Bloomberg, local sources, Fitch Solutions
Developed Markets: Momentum Weakening Further
Aggregate developed market (DM) growth will still come in higher than the pre-pandemic average in 2022, but the growth outlook
has deteriorated further over the past month, in the face of still high inflation, weak consumer confidence and increasingly hawkish central
banks.
In August 2022, we lowered our DM real GDP growth forecast to 2.3% in 2022 and 1.5% in 2023, from 2.6% and 1.6% in July. The 2022 revision
mainly reflects lower expected growth in the US, which now anticipate to grow by 1.8%, from 2.4% previously as a result of a weaker-than-
expected growth print in H122. We have also made downward revisions for Hong Kong, China (1.0% to -0.2%) and Norway (3.6% to 2.8%). By
contrast, we now anticipate slightly stronger growth in the eurozone (2.5% to 2.6%), primarily owing to a more bullish outlook on Italy (2.9% to
3.2%) and France (2.3% to 2.4%), which more than offset lower expected growth in Belgium (2.2% to 2.0%). In Europe, we revised up our growth
forecasts for the Czech Republic (1.6% to 1.9%) and (slightly) the UK (3.4% to 3.5%). In Asia we have raised our growth projections for Singapore
(3.0% to 3.5%) and Taiwan, China (2.9% to 3.2%).
Turning to 2023, our aggregate DM downward revision is chiefly a result of weaker expected growth in the US and the UK as we now forecast that
they will grow by 1.6% and 0.6% respectively, from 1.8% and 0.8% previously. We have also cut our 2023 growth projections for the Czech Republic
by 1.4 percentage points (pp) and 0.8pp respectively, to 1.2% and 1.7%.
Risks To The Downside Despite Revisions

Selected DMs – Real GDP Growth, % (2022f)
Note: May include territories, special administrative regions, provinces and autonomous regions. f = forecast. Source: Fitch Solutions
The private sector survey data are mixed, but hint at weakening momentum overall. The S&P Global composite purchasing managers'
index (PMI) for the largest DM economies either fell below the expansionary 50 mark in July (including Italy, Germany and the US) or, despite
remaining above 50, eased relative to June (France, Japan and the UK) (see chart below). This reinforces our outlook of decelerating DM growth.
The US recorded the largest drop in the composite PMI in July, which fell 4.6 points from June to 47.7 in July, signalling the first contraction in
private sector business activity since June 2020 and reflecting a monthly decrease for the service sector.
Private Sector Slowing

Selected DMs – Composite PMIs, Index
Source: S&P Global, Fitch Solutions
Labour markets remain strong, but we believe that unemployment rates may have bottomed out as leading indicators point to a
softening of hiring conditions. While unemployment remains below pre-pandemic levels in most DMs, most of the largest economies saw the
unemployment rate remain stable in June after decreasing for several months in a row, including the UK, Canada, France, Japan and Spain. This is a
sign that the pace of labour market momentum may have started to ease.
While the US economy added 528,000 jobs in July (against analyst forecasts of 250,000), the ISM employment manufacturing and services indices
remained in contractionary territory in July (albeit less so than in June). Jobless claims are on the rise, which also suggests weaker hiring activity.
Labour Markets Remain Tight, But Momentum Weakening

Selected DMs – Unemployment Rate, %
Source: Local sources, Fitch Solutions
Still high energy prices pushed DM inflation to its highest level in a decade in June, with negative implications for consumer purchasing
power and consumer sentiment. We estimate average DM inflation at 7.6% y-o-y in June, up from 7.2% in May, and we expect an even higher
inflation rate in July due to higher inflation in most of the economies that have already released July prints (but in the US inflation eased more than
expected). At market level, inflation is particularly elevated in Spain (10.8% y-o-y), the UK (9.4% y-o-y), US (8.5%), Canada (8.1%) and Italy (7.9%). In
Japan, inflation stood at 2.4% y-o-y in June, little changed from May's 7.5-year high (see chart below).
Inflation Stuck At Record-High Levels

Selected DMs - Inflation, % chg y-o-y
On a more positive note, market-based measures of inflation expectations remain below their April highs, suggesting lower (but still above target)
inflation in the medium term. The US dollar and the euro five-year five-year inflation swap rates stood at 2.6% and 2.1% respectively as of August 8
2022, down from 2.9% and 2.4% in April (but slightly up from late July) (see chart below).
Inflation Expectations Coming Off April’s Highs

USD, GBP & EUR Five-Year Five-Year Inflation Swap Rate, %
The latest export data indicate that global trade were supportive of growth in H122, but we expect global trade momentum to weaken
in the months ahead. On a monthly basis, exports also rose in all the largest DMs in May and June. For example, in June US exports increased by
1.7% m-o-m to USD260.8bn, the highest since the series began in 1950, while UK exports rose by 4.1% m-o-m to a 29-month high of GBP61.1bn
(see chart below). That said, robust nominal export growth rates partly reflect price rises due to high inflation rather than pure volume effects. We
believe that support to growth from global trade will weaken over the remainder of 2022 against a challenging backdrop of elevated inflation, still
existing supply side disruptions, high commodity prices and tighter monetary policy.
Global Trade Still Supportive Of Growth, But This May Change

Selected DMs - Exports, % chg m-o-m
DEVELOPED MARKETS - REAL GDP GROWTH FORECASTS, % Y-O-Y (2019-2026)

2019 2020 2021 2022f 2023f 2024f 2025f 2026f
Developed Market Aggregate Growth 1.8 -4.4 5.2 2.3 1.5 1.9 1.9 1.9
G7 1.7 -4.7 5.1 2.1 1.4 1.7 1.7 1.7
Eurozone 1.6 -6.2 5.4 2.6 1.0 1.9 1.7 1.7
EU-27 1.8 -5.8 5.4 2.7 1.3 2.1 1.9 1.9
Selected Developed Markets
Australia 2.1 -2.1 4.8 4.0 2.9 2.6 2.6 2.6
Austria 1.5 -6.7 4.5 3.0 0.9 1.8 1.5 1.4
Belgium 2.2 -5.7 6.3 2.0 1.0 1.9 1.6 1.7
Canada 1.9 -5.2 4.6 3.6 2.0 1.0 1.4 1.6
Czech Republic 3.0 -5.5 3.5 1.9 1.2 3.2 4.0 3.7
Denmark 2.1 -2.1 4.7 2.8 2.0 1.5 1.5 1.5
Finland 1.2 -2.3 3.3 1.5 0.8 1.6 1.4 1.6
France 1.8 -7.8 6.8 2.4 1.0 1.7 1.6 1.4
Germany 1.1 -4.6 2.9 1.5 1.0 1.6 1.7 1.6
Hong Kong, China -1.7 -6.5 6.4 -0.2 2.9 1.3 1.8 1.8
Ireland 4.9 5.9 13.5 6.0 1.6 3.6 3.4 3.3
Italy 0.5 -9.0 6.6 3.2 0.6 1.8 1.4 1.4
Japan -0.2 -4.5 1.7 1.8 1.3 1.0 1.0 0.9
Netherlands 2.0 -3.8 4.8 2.7 1.0 2.2 1.5 1.4
Norway 0.7 -0.7 3.9 2.8 1.7 2.2 1.8 1.8
Portugal 2.7 -8.4 4.9 4.1 2.0 1.8 1.5 2.2
Singapore 1.1 -4.1 7.6 3.5 2.8 2.9 2.9 2.8
South Korea 2.2 -0.7 4.1 2.6 2.5 2.5 2.5 2.5
2019 2020 2021 2022f 2023f 2024f 2025f 2026f
Spain 2.1 -10.8 5.1 4.2 1.2 2.5 1.9 1.9
Sweden 2.0 -2.9 4.8 2.6 2.1 2.1 2.1 2.1
Switzerland 1.2 -2.4 3.8 2.5 1.2 1.7 1.7 1.7
Taiwan, China 3.1 3.4 6.6 3.2 2.6 2.9 3.0 3.0
UK 1.7 -9.3 7.4 3.5 0.6 1.9 1.7 1.7
US 2.3 -3.4 5.7 1.8 1.6 1.9 2.0 2.0
Note: May include territories, special administrative regions, provinces and autonomous regions. f = Fitch Solutions forecast. Source: Local sources, Fitch Solutions
Emerging Markets: Worries Building
The first wave of emerging markets (EMs) to release Q222 GDP figures confirmed our expectation that economic conditions would
deteriorate in most markets. Activity held up better than we had expected in Mexico, where growth came in unchanged at 1.0% q-o-q (see
chart below) despite weak confidence and a slowdown in the US. The stronger-than-expected performance led us to revise up our 2022 Mexico
growth forecast.
Losing Steam
EMs - Real GDP, % q/q
Elsewhere, EMs performed much worse in Q222 than in Q122. Growth slowed from 2.6% q-o-q to (a still robust) 1.8% in Saudi Arabia and from
0.9% to a weaker-than-expected 0.2% in the Czech Republic. The sharpest slowdown, however, came in Mainland China, where activity fell by 2.6%
q-o-q. We think that China’s slowdown has now bottomed out, and that growth will pick up in H222. With the worst of China’s slowdown now
behind us, we expect that EM growth will strengthen over the remainder of 2022 and into 2023.
In the immediate term, however, conditions for EMs remain difficult. Weak economic data in both DMs and EMs have hit investor
sentiment in recent months, contributing to a record-breaking fifth consecutive month of capital outflows in July. In aggregate, EMs experienced
USD9.8bn worth of capital outflows last month, mostly in the form of foreigners’ selling debt positions (see chart below). These outflows added
more downside pressure to EM currencies, most of which weakened against the US dollar in July 2022 but recovered slightly in August.
Investors Losing Faith

EMs – Net Capital Flows, USDbn
The latest EM inflation news was mixed. While EM-wide inflation picked up from 5.0% in May to 5.3% in June (or from 7.9% to 8.1% if China is
excluded, see chart below, left), early data from July suggest that that inflationary momentum eased. While inflation picked up in 84.2% of EMs in
June, it only accelerated in 68.4% of the EMs to have released July data (see chart below, right). This strengthened our view that EM inflation is
nearing its peak.
Inflation Has Picked Up, But Nearing Peak

EMs - Inflation, % chg y-o-y (LHC) & Share Of EMs With Accelerating Inflation, % (RHC)
Even so, EM policymakers continued to hike their key policy rates in July and early August 2022. Argentina’s central bank went the furthest, hiking
its key rate from 52.00% to 60.00% in July and then to 69.5% in August. Elsewhere, policymakers in Hungary raised their key rate from 7.75% to
10.75% and those in Colombia made two hikes to take the rate from 6.00% to 7.50% and then to 9.00%. Hikes in other markets were smaller, but
hawkish language from Nigeria (where policymakers hiked from 13.00% to 14.00%) and Brazil (where they hiked from 13.25% to 13.75%)
convinced us that both banks will hike by further than we had previously expected.
The Central Bank of Russia continued to buck the EM-wide trend by cutting its key rate from 9.50% to 8.00%. In China, policymakers reduced the
medium-term lending rate at which they provide one-year loans to the banking sector from 2.85% to 2.75%. The cut suggests that policymakers
are worried about the effect of weak consumer demand and problems in the real estate sector.
MENA: Growth Outperformance
We left our 2022 Middl East and North Africa (MENA) real GDP growth forecast unchanged at 3.4% in August and expect that the
region will be the fastest-growing in the EM world (see chart below). In 2023, we expect that growth in the region will slow to 4.6%, causing
the region to slip behind an accelerating EM Asia. In part, this strong result will be driven by robust growth of 7.6% in Saudi Arabia and 7.8% in Iran
in 2022.
Ahead In 2022
EMs – Real GDP Growth Forecast, % (2022)
Note: May include territories, special administrative regions, provinces and autonomous regions. Source: Fitch Solutions
The stability of our 2022 headline forecast obscures one major MENA revision: we have raised our Algeria growth forecast from 3.0% to 3.4% on
the expectation of strong hydrocarbon earnings and looser fiscal policy.
EM Asia: Second Fastest-Growing Region
We retained our forecast that EM Asia will experience headline growth of 4.4% in 2022. While we expect that India (8.0%) will be the
fastest-growing major EM, poor economic performance in China (3.6%) will drag on growth across the region. We expect that growth in China will
accelerate to 5.5% in 2023, taking growth across EM Asia up to 5.5%.
Forecast On Hold As Mainland China Drags On Region

EM Asia – Real GDP Growth Forecast, % (2022)
Note: May include territories, special administrative regions, provinces and autonomous regions. *Fiscal years ending March 31 (2022 = 2022/23). Source: Fitch Solutions
We made three revisions over the past month, raising our 2022 forecast for the Philippines (from 6.1% to 6.6%) for Indonesia (4.8% to 5.2%) and
Malaysia (5.2% to 5.9%) (see chart above) as growth in these economies surprised to the upside in H122.
SSA: Slight Upward Revisions
We raised our 2022 growth forecast for Sub-Saharan Africa (SSA) very slightly in August, from 3.2% to 3.3%. The revision was due to
changes to our forecasts for very small Equatorial Guinea (2.0% to 2.4%) and the Republic of the Congo (Congo-Brazzaville, 1.2% to 1.6%) (see
chart below).
Slight Upward Revision For SSA

SSA – Real GDP Growth Forecast, % (2022)
These upward revisions more than counterbalanced a more pessimistic forecast for South Sudan (3.3% to 1.5%). The downward revision was due
to a more bearish forecast for oil production. We expect that growth in SSA will pick up to 3.8% in 2023 due to stronger performances from all of
the region’s larger economies.
Latin America: Rare Upward Revisions
We revised our 2022 real GDP growth forecast for Latin American from 1.9% to 2.0% due to more upbeat forecasts for Colombia
and Mexico. These were among countries for which we made the largest forecast revisions (see chart below).
Latin America Stands Out

EMs – Real GDP Growth, Forecast Revision In August, pp (2022)
Note: May include territories, special administrative regions, provinces and autonomous regions. Source: Fitch Solutions
We have raised our forecast for Colombia (from 4.6% to 5.6%) due to above-expected household consumption growth and higher real energy
export growth. We increased our Mexico forecast from 1.5% to 2.0% following a stronger-than-expected outturn in H122. While we think that US
growth will slow, strong import demand will limit the effect on Mexico. Headwinds from the US suggest that region-wide growth will be stable at
2.0% in 2023.
EM Europe: War Depressing Headline Growth
In EM Europe, we revised up our 2022 real GDP forecast marginally from a contraction of 4.0% to a fall of 3.9%. This figure is, of
course, significantly skewed by the 12.5% contraction that we expect in Russia. If Russia and Ukraine are excluded, we expect that the rest of EM
Europe will experience growth of 3.3% (see chart below).
Slight Upward Revisions

EM Europe – Real GDP Growth Forecast, % (2022)
We raised our 2022 forecast for Croatia (from 3.2% to 4.6%) following strong growth figures in early 2022 and signs that the tourist sector
rebounded during the summer months. We also raised our forecast for Uzbekistan (from 2.8% to 4.2%) after data for the early part of the year
showed a smaller drag from the Russia-Ukraine war than we had previously expected.
EMERGING MARKETS - REAL GDP GROWTH FORECASTS, % Y-O-Y (2019-2026)

2019 2020 2021 2022f 2023f 2024f 2025f 2026f
Emerging Market Aggregate Growth 3.7 -1.3 6.8 3.4 4.4 4.7 4.5 4.4
Latin America 0.8 -6.6 6.7 2.0 2.0 2.3 2.4 2.4
Argentina -2.0 -9.9 10.4 2.5 1.7 1.9 1.9 2.0
Brazil 1.2 -3.9 4.6 0.8 1.5 2.2 2.2 2.2
Chile 0.9 -5.8 11.7 1.4 0.8 2.0 2.5 2.1
Colombia 3.3 -7.1 10.7 5.6 3.4 3.0 2.9 3.0
Mexico -0.2 -8.1 4.8 2.0 1.7 2.2 2.2 2.1
Middle East And North Africa 0.3 -3.1 5.6 6.4 4.6 4.0 3.8 3.7
Saudi Arabia 0.3 -4.1 3.2 7.6 3.7 3.0 2.9 2.8
UAE 3.4 -6.1 3.8 6.2 4.1 4.2 3.9 3.4
Iran -6.8 3.4 4.5 7.8 6.3 5.4 4.8 4.8
Algeria 0.8 -4.9 3.5 3.4 2.5 2.2 1.8 1.9
Egypt 5.6 3.6 3.3 6.2 4.3 4.3 4.0 4.1
Sub-Sharan Africa 2.8 -1.7 4.4 3.3 3.8 3.9 3.9 4.0
South Africa 0.0 -6.2 4.9 1.7 1.9 1.7 2.2 2.4
Kenya 5.0 -0.3 7.5 5.2 5.4 5.2 5.3 5.4
Ethiopia 8.4 6.1 3.9 5.3 6.2 6.6 6.9 6.6
Nigeria 2.2 -1.8 3.4 2.4 2.9 3.0 2.2 2.0
2019 2020 2021 2022f 2023f 2024f 2025f 2026f
Emerging Asia 5.4 0.3 7.4 4.4 5.5 5.5 5.4 5.4
China (Mainland) 6.0 2.3 8.1 3.6 5.5 5.4 5.3 5.2
India* 3.7 -6.6 8.7 8.0 6.6 6.4 6.5 6.6
Indonesia 5.0 -2.1 3.7 5.2 5.0 5.2 5.1 5.1
Malaysia 4.3 -5.6 3.1 5.2 3.8 3.8 3.8 3.8
Philippines 6.1 -9.6 5.6 6.6 6.2 6.1 6.1 6.1
Thailand 2.2 -6.2 1.5 3.1 3.9 3.2 2.7 2.7
Emerging Europe 2.7 -2.1 6.3 -3.9 1.7 4.1 2.9 2.9
Russia 2.2 -2.7 4.8 -12.5 -1.0 5.0 1.8 1.1
Turkey 0.9 1.8 11.0 3.3 2.4 3.7 3.2 3.4
Hungary 4.4 -4.9 6.5 3.3 2.0 2.0 2.1 2.5
Romania 4.2 -3.7 5.9 4.7 3.3 3.4 3.3 3.3
Poland 4.5 -2.5 5.7 4.5 2.9 4.5 3.9 4.6
Note: May include territories, special administrative regions, provinces and autonomous regions. *Fiscal years ending March 31 (2022 = 2022/23). f = forecast. Source: Fitch Solutions
Note: Our forecasts are updated frequently; as a result, the views and forecasts in this section may not match those in other sections of the report.
Index Tables
SHORT-TERM POLITICAL RISK INDEX

Score Trend Regional Rank Global Rank
Singapore 95.6 + 1 1
Norway 92.9 = 2 2
Luxembourg 89.8 = 3 4
Denmark 88.3 - 4 5
Canada 88.1 - 5 6
Switzerland 86.9 = 6 8
Iceland 83.1 - 7 9
Netherlands 82.5 = 8 11
Finland 82.2 - 9 12
Japan 82.1 = 10 13
New Zealand 82.1 - 10 13
Malta 81.7 = 12 16
Sweden 80.6 - 13 20
Austria 79.3 = 14 23
Ireland 79.1 = 15 24
Australia 78.3 = 16 27
Hong Kong, China 78.1 = 17 29
South Korea 76.9 = 18 33
UK 76.5 = 19 34
Portugal 75.6 = 20 35
Germany 75.2 - 21 37
Czech Republic 74.2 = 22 41
Taiwan, China 72.1 - 23 47
France 71.9 = 24 48
US 71.7 = 25 50
Estonia 71.0 = 26 54
Slovenia 69.0 = 27 59
Greece 68.3 = 28 62
Slovakia 66.8 = 29 69
Italy 66.5 - 30 70
Spain 64.3 - 31 83
Israel 60.2 - 32 102
Belgium 59.4 = 33 105
Cyprus 55.2 = 34 120
Regional average 76.6/Global average 60.5/Emerging Markets average 57.0
Note: May include territories, special administrative regions, provinces and autonomous regions. Scores out of 100; higher score = lower risk. Source: Fitch Solutions
LONG-TERM POLITICAL RISK INDEX

Norway 97.2 = 1 1
Sweden 93.4 - 2 2
Denmark 92.6 + 3 3
Finland 91.8 = 4 4
Canada 91.2 - 5 5
Iceland 90.7 + 6 6
Austria 89.7 - 7 7
Czech Republic 88.6 - 8 8
Germany 88.1 = 9 9
UK 87.7 - 11 11
Switzerland 87.5 - 12 12
Ireland 87.3 + 13 13
Japan 87.3 = 13 13
Netherlands 86.2 - 15 15
New Zealand 85.9 + 16 16
Estonia 84.2 + 17 17
South Korea 83.3 - 18 18
Slovenia 82.8 + 19 19
France 81.2 - 22 22
Slovakia 81.2 + 22 22
Malta 80.6 - 24 24
Belgium 80.1 = 25 27
US 78.4 - 26 31
Portugal 77.3 = 27 34
Spain 75.7 - 28 35
Italy 75.1 - 29 38
Taiwan, China 75.1 + 29 38
Israel 70.0 - 31 58
Cyprus 69.7 - 32 60
Greece 68.0 + 33 73
Hong Kong, China 60.1 - 34 102
SHORT-TERM ECONOMIC RISK INDEX

Ireland 82.9 + 2 3
Israel 80.8 - 3 4
South Korea 80.4 = 4 5
Norway 80.2 - 5 6
Malta 78.3 + 6 7
Austria 73.3 - 10 12
Slovenia 73.3 - 10 12
Denmark 72.9 - 13 15
Canada 71.9 + 14 16
Germany 71.5 - 16 18
US 71.5 - 16 18
Finland 70.6 - 19 21
Sweden 70.0 - 20 22
New Zealand 69.6 - 21 24
Spain 68.1 - 22 26
France 67.9 = 23 27
Estonia 67.7 - 24 28
UK 66.1 - 25 33
Belgium 65.8 + 26 34
Slovakia 65.6 - 27 35
Japan 64.6 + 28 43
Italy 63.8 - 29 46
Portugal 62.7 - 30 48
Iceland 61.7 + 31 52
Cyprus 61.3 = 32 56
Czech Republic 61.3 - 32 56
Greece 54.4 = 34 77
LONG-TERM ECONOMIC RISK INDEX

Norway 83.1 = 1 1
Germany 80.9 + 3 3
Denmark 80.5 = 4 4
South Korea 79.9 + 5 5
Ireland 79.3 + 6 6
Israel 79.3 + 6 6
Sweden 78.9 - 8 8
Slovenia 78.7 = 9 9
Estonia 78.2 = 10 10
Canada 76.8 - 12 12
Malta 75.4 - 14 14
US 75.4 = 14 14
Finland 74.6 + 16 16
Australia 74.5 + 17 18
France 74.5 = 17 18
Austria 74.1 - 20 21
New Zealand 74.1 = 20 21
Czech Republic 70.7 + 24 27
Belgium 70.6 + 25 28
Slovakia 69.4 - 26 30
Iceland 68.9 - 27 31
UK 66.8 - 28 37
Japan 66.0 = 29 38
Spain 64.5 = 30 40
Cyprus 64.4 = 31 42
Italy 63.0 - 32 48
Portugal 61.3 - 33 52
Greece 54.5 = 34 81
Note: Fitch Solutions' Country Risk Indices are updated frequently; as a result, the scores in this section may not match those in other sections of
the report.
Macroeconomic Forecasts

Indicator 2021e 2022f 2023f 2024f 2025f 2026f
Nominal GDP, USDbn 2,100.2 2,090.1 2,264.6 2,400.6 2,591.8 2,815.8
Real GDP growth, % y-o-y 6.6 3.4 0.4 1.8 1.4 1.4
GDP per capita, USD 34,789 34,682 37,650 39,997 43,285 47,149
Population, mn 60.37 60.26 60.15 60.02 59.88 59.72
Unemployment, % of labour force, eop 8.4 8.5 8.0 7.5 7.5 7.5
Consumer price inflation, % y-o-y, ave 2.0 7.5 4.0 1.4 2.0 2.0
Central bank policy rate, % eop 0.00 1.75 1.75 1.75 1.75 1.75
Private final consumption, real growth % y-o-y 5.2 3.4 0.2 1.8 1.5 1.5
Fixed capital formation, real growth % y-o-y 17.0 9.0 1.0 2.6 2.0 2.0
Exchange rate EUR/USD, ave 0.85 0.94 0.91 0.88 0.85 0.81
Exchange rate EUR/EUR, ave 1.00 1.00 1.00 1.00 1.00 1.00
Goods and services exports, USDbn 687.6 760.9 752.3 745.0 799.7 863.8
Goods and services imports, USDbn 638.4 749.9 726.2 712.5 767.2 830.7
Balance of trade in goods and services, USDbn 49.2 11.0 26.2 32.5 32.4 33.1
Balance of trade in goods and services, % of GDP 2.3 0.5 1.2 1.4 1.3 1.2
Current account balance, USDbn 51.3 8.3 21.6 28.2 27.8 28.0
Foreign reserves ex gold, USDbn 53.2 62.5 60.5 59.4 63.9 69.2
Import cover, months 1.0 1.0 1.0 1.0 1.0 1.0
Budget balance, USDbn -151.8 -115.0 -124.6 -84.0 -77.8 -84.5
e/f = Fitch Solutions estimate/forecast. Source: National sources, Fitch Solutions

Indicator 2027f 2028f 2029f 2030f 2031f
Nominal GDP, USDbn 2,934.7 3,034.0 3,136.7 3,242.8 3,352.5
Nominal GDP, EURbn 2,347.7 2,427.2 2,509.3 2,594.2 2,682.0
Real GDP growth, % y-o-y 1.4 1.4 1.4 1.4 1.4
GDP per capita, USD 49,275 51,091 52,976 54,933 56,962
GDP per capita, EUR 39,420 40,872 42,381 43,946 45,570
Population, mn 59.56 59.38 59.21 59.03 58.85
Unemployment, % of labour force, eop 7.5 7.5 7.5 7.5 7.0
Consumer price inflation, % y-o-y, ave 2.0 2.0 2.0 2.0 2.0
Central bank policy rate, % eop 1.75 1.75 1.75 1.75 1.75
Private final consumption, % of GDP 57.8 57.8 57.9 58.0 58.0
Private final consumption, real growth % y-o-y 1.5 1.5 1.5 1.5 1.5
Government final consumption, % of GDP 18.9 18.8 18.7 18.7 18.6
Government final consumption, real growth % y-o-y 1.0 1.0 1.0 1.0 1.0
Fixed capital formation, % of GDP 21.5 21.7 21.8 21.9 22.1
Fixed capital formation, real growth % y-o-y 2.0 2.0 2.0 2.0 2.0
Exchange rate EUR/USD, ave 0.80 0.80 0.80 0.80 0.80
Exchange rate EUR/EUR, ave 1.00 1.00 1.00 1.00 1.00
Goods and services exports, USDbn 895.1 920.2 945.9 972.4 999.6
Goods and services imports, USDbn 862.9 889.2 916.2 944.5 972.8
Balance of trade in goods and services, USDbn 32.2 31.0 29.7 27.9 26.8
Balance of trade in goods and services, % of GDP 1.1 1.0 0.9 0.9 0.8
Current account balance, USDbn 26.9 25.5 24.0 22.0 20.7
Current account balance, % of GDP 0.9 0.8 0.8 0.7 0.6
Foreign reserves ex gold, USDbn 71.9 74.1 76.4 78.7 81.1
Import cover, months 1.0 1.0 1.0 1.0 1.0
Budget balance, USDbn -88.0 -91.0 -94.1 -97.3 -100.6
Budget balance, % of GDP -3.0 -3.0 -3.0 -3.0 -3.0
f = Fitch Solutions forecast. Source: National sources, Fitch Solutions
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Italy Q4 2022

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Italy Q4 2022

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Q4 2022

MACROECONOMIC FORECASTS (ITALY 2020-2023)

Recent Strength In Italian Economic Data Belies A Weaker Outlook

Italian Economic Activity To Lose Considerable Momentum

f = Fitch Solutions forecast. Source: Eurostat, Fitch Solutions

Weak Outlook For Consumption Underpins Our Downbeat Forecasts

f = Fitch Solutions forecast. Source: Eurostat, Fitch Solutions

GDP By Expenditure Breakdown

Source: Eurostat, Fitch Solutions

Sharply Negative Real Wage Growth Pushing Consumer Confidence Lower

Source: Eurostat, Istat, Fitch Solutions

Investment Expectations Decline Markedly, In Tandem With Plunging Business Confidence

Source: Bank of Italy, Istat, Fitch Solutions

Italian Financial Conditions Have Tightened Notably

Source: Bloomberg, Fitch Solutions

Rebound In Tourism Industry, But Backdrop For Goods Exports Weakens

Source: Eurocontrol, Eurostat, Fitch Solutions

GDP By Expenditure Outlook

GDP GROWTH FORECASTS (ITALY 2020-2025)

PRIVATE CONSUMPTION FORECASTS (ITALY 2020-2025)

GOVERNMENT CONSUMPTION FORECASTS (ITALY 2020-2025)

FIXED INVESTMENT FORECASTS (ITALY 2020-2025)

NET EXPORTS FORECASTS (ITALY 2020-2025)

External Trade And Investment Outlook

Italian Current Account Surplus To Narrow On Higher Energy Prices

Italy Current Account Surplus To Narrow

f = Fitch Solutions forecast. Source: Bank of Italy, Fitch Solutions

Source: Istat, Fitch Solutions

Source: Eurostat, Fitch Solutions

Recovery In The Key Tourism Sector Supporting Service Sector Exports

Source: Bank of Italy, Eurocontrol, Fitch Solutions

Italy's External Debt Load Compares Favourably To Peers

Source: Eurostat, Fitch Solutions

Outlook On External Position

NIIP Returns To Surplus

Source: Eurostat, Banca d'Italia, Fitch Solutions

External Debt Continues To Trend Higher

Source: Banca d'Italia, Fitch Solutions

Surplus Stable Over Long Term

f = Fitch Solutions forecast. Source: Bank of Italy, Fitch Solutions

ITALY - CAPITAL & FINANCIAL ACCOUNT BALANCE

TOP FIVE GOODS EXPORTS

Source: ITC, Fitch Solutions

TOP FIVE GOODS IMPORTS

Source: ITC, Fitch Solutions

CURRENT ACCOUNT BALANCE FORECASTS (ITALY 2020-2025)

Monetary Policy Outlook

ECB Hikes Rates To An 11-Year High, With More To Come

It Will Be Difficult To Extend A Hiking Cycle Beyond Q422

Source: Bloomberg, Fitch Solutions

Inflation Above Target And Forecasting Has Been A Challenge

Source: ECB, Eurostat, Fitch Solutions

Forward-Looking Indicators Hardly Consistent With Sustained Inflation

Source: Eurostat, FRED, Fitch Solutions

Bundesbank Held Up As The Example To Follow

Source: Bundesbank, Fitch Solutions

ECB Has Been Forced To Reverse Course Before

Source: Bloomberg, Fitch Solutions

Incomplete Fiscal Union Creates Problems For The ECB

Higher Rates For Longer, With Spreads Pushing Wider

Source: Bloomberg, Fitch Solutions

Monetary Policy Outlook

Inflation Around Target Over Long Term

f = Fitch Solutions forecast. Source: Eurostat, Fitch Solutions