La Spada di Damocle Italiana

The positive trend of the economy and the constant problem of inflation and debt

by Gianni Malerba

Let's pick up where we left off last time when talking about inflation: in the article "Inflation doesn't stop" we took stock of the impact of the gas crisis on prices and their effects, in particular, on the shopping carts of Italians. It was September 28, 2022, just a few days before the political vote, with all the physiological doubts that this had entailed.

A lot has changed since that day, of course, but what we can well consider the Italian Sword of Damocles always remains: inflation, the problem that all governments have always faced, and the resulting public debt.

Fitch's rating, Moody's expectations

"The growth of the Italian economyexceeded our expectationsin the first quarter of 2023, recovering sharply to 0.5% q/q [...] thanks to the significant easing of the natural gas crisis in Europe, a strong rebound in tourism and strengthening global demand". These are the words that accompany Fitch's rating which assigns Italy a BBB, also adding that "in 2024 we expect the economy to expand by 0.8%". It seems that the Government's efforts are appreciated by the markets who have chosen to place their trust in our country.

We will have to wait a few days before understanding what the judgment of Moody's, the traditionally strictest rating agency towards our country, will be, but it is already possible to make a positive assessment of Italy today. Undoubtedly, the Next Generation EU funds towards our country (the so-called PNRR) also contribute to this result, as well as the fact that Italy is part of the EU Economic and Monetary Union which, in some way, acts as a guarantee.

One of the most interesting aspects that contributed to Fitch's rating is the stability of the Government, whose majority is large and consensus among citizens is high. What does this mean for the Italian economy and the markets' gaze on us? In short, that this Government could last an entire legislature, carrying forward its decisions without a forced stop and the consequent blocking of governmental and legislative action. This is certainly another point in favor of our economy, but then where does this Sword of Damocles come from? Why, in short, despite many positive factors, does the Italian rating remain at BBB?

Inflation, public debt and burden on businesses

In the face of greater stability in the banking system, companies are almost exhausted, due to galloping inflation (which impacts in the short term) and a consequent increase in public debt (which impacts in the medium-long term).

According to EURISC - CRIF Credit Information System, in the first quarter of 2023 the credit demand presented by Italian businesses suffered a sharp slowdown: -3.6% compared to 2022. The increase in inflation increases the cost of money, which therefore businesses can no longer afford. The words of Simone Capecchi, Executive Director of CRIF are, from this point of view, illuminating: “if families can decide to postpone a credit request until interest rates have decreased,land businesses have non-deferrable costs and a permanent need for liquidity".

Even more worrying is the default rate, which is growing compared to previous years. Businesses borrow less money and when they do they are more likely to fail to repay credit institutions.

Here is the vulnerability, the Sword of Damocles: short-term policies, capable of controlling gas prices, for example, and obtaining positive ratings from agencies, will never alone be able to help our country run together with its natural engine, i.e. businesses. It is these, especially SMEs, who must look towards medium-long term policies, to be able to be competitive and in this way block inflation and try to block public debt.

The tools to support businesses in the medium-long term

On the one hand the CNC, the Negotiated Settlement of the Business Crisis, to name a tool. We have talked about it at length on our blog, it is worth reading the latest update article on this topic: PNRR, Telematic Platforms and CNC. It is important, in this context of "return default", to consider a tool capable of accompanying the company in the least traumatic way possible for the system, to keep the market standing and not generate a systemic crisis of the production sector.

But in addition to this tool, the other great opportunity is, obviously, sustainability. Beyond the more immediate tools that have now entered our system (see the tax credit, which you can read in this article), sustainability and ESG criteria are the most suitable tools to give a vision of the future in the medium-long term to businesses, to generate value and make it grow exponentially over time. To have a more general vision of the advantages of sustainability, in particular for SMEs, it is worth rereading our previous article here.

But then, if the real problem of our country is not today, the crises that follow one another and to which we can put a stop, albeit temporary, but a structural public debt and inflation that we have been carrying with us for a long time, then why do we continue to invest only in short-term solutions without instead considering medium-long term interventions as investments in sustainability could do?

Otherwise, we will have to evaluate the hypothesis of never freeing ourselves from our Sword of Damocles due to the lack of courage in investing in the future.