Escalating energy prices and supply chain risk to slash Italian growth, warns industrial confederation

The ongoing war in Ukraine is having a major negative impact on the Italian economy and will likely drag the nation’s GDP growth down to 1.9% this year, as opposed to the pre-war forecasts of 4%, according to the Italian Confederation of Industry (Confindustria). Latest research from the body finds that Russia’s invasion of Ukraine acted as a “deep supply shock” that remains difficult to quantify because the picture is constantly evolving. “The military crisis, however, is grafted onto a picture already made difficult by the persistence of the pandemic, the upward pressure on the prices of various commodities and bottlenecks in some global supply chains,” states Confindustria. Its analysis, based partly on research carried out with member companies, finds that the effects of the crisis at global level are highly unequal across different areas and sectors. The association says the key factors that determine the impact are: proximity to the war; dependence on oil, gas and other commodities; and production and financial connections with the countries directly involved in the war. Energy-intensive sectors such as metallurgy, chemistry, ceramics and glass, as well as other highly international sectors such as transport, are the most directly hit, concludes Confindustria. The main problem faced by Italian companies is the increase in energy, agricultural and metal prices, it adds. “The escalation of tensions on the markets for these commodities is due to the fact that Russia, Ukraine and Belarus are among the main suppliers in the world. Two examples: Russia in 2020-2021 exported 38 million tons of wheat, equal to 14.8% of the world total; and is the seventh-biggest producer of copper in the world, with a share equal to 3.8% of the total,” states the association. The rising price of gas and oil, plus supply uncertainty, are a big threat to Italian industry, says Confindustria. Russian gas accounts for 38% of Italian consumption. At the beginning of March, the price of gas rose to a peak of €227 per mwh, compared to €72 on the eve of the conflict. Similarly, the price of oil is now $133 per barrel, up from $99 before the conflict. The price of wheat rose by more than 34% in two weeks and then fell, but without returning to the pre-war level. The price of corn rose by 10% and metals such as copper, aluminium and nickel also experienced further price increases. The bottom line is that the rising prices of energy and other commodities are significantly increasing the cost of business. Confindustria’s analysis shows the impact translates into a €5.7bn rise in the Italian energy bill on a monthly basis, or an increase of €68bn on an annual basis. The association says that so far, companies have largely absorbed these cost increases in their margins, instead of passing them onto the subsequent stages of production. “The eroded margins explain why core inflation in Italy is low, much more than elsewhere. The only positive aspect is that this trend in prices and margins has safeguarded the competitiveness of Italian companies compared to those of other countries, but it is not sustainable. For this reason, several companies are reducing or stopping production, or plan to do so in the coming months,” says Confindustria. Sanctions and counter-sanctions also contribute to the worsening outlook in Italy and across Europe, it continues. The direct impact of sanctions on Russia for Italian exports is “modest” overall, it says. Russia, Ukraine and Belarus only account for 1.5% of total Italian exports. But the association says there are some specific Italian products, for example some machinery, where the Russian market exceeds 10%. “The export of goods is penalised by the conflict also because this will tend to strengthen the bottlenecks in the global supply network, already seen in 2021. The geographical specialisation of Italian exports, more aimed at EU countries, will not help, as well as the product specialisation of our exports, in which, for example, the sector of metal products counts for a lot,” points out the association. “In this context, even the positive effects deriving from the implementation of the National Recovery and Resilience Plan are at risk, because some of the planned investments may be difficult to achieve at current prices. Furthermore, the shortage of various materials could make it difficult to make some investments on schedule. It is therefore likely that some projects will need to be revised in the light of the current context, in order for the plan to be effectively implemented,” says Confindustria. “The trend of Italian GDP in 2022 is much less favourable than previously estimated. This year there would be an increase of 1.9%, with a large downward revision (two points) compared to the scenario outlined last October, before the new shocks, when all forecasters agreed on growth of 4%,” it adds.

Escalating energy prices and supply chain risk to slash Italian growth, warns industrial confederation

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