public accounts improving for some states. It's Italy?

In Europe, several countries are performing well in reduction of the report deficit/GDP. However, the budget data released by Italy are not as good as hoped. Numbers that will be read carefully in the EU also in light of the debate on the new Stability Pact.

Deficit spending higher than expected

Growth forecasts for next year have been cut to 1.2%, while deficit targets have been raised to 5.3% this year and 4.5% in 2024.

It could be argued that deficit spending is necessary in these circumstances, given that growth levels are rather stagnant across the continent, which is still dealing with the repercussions of Covid shocks and energy supply concerns . However – explains Kaspar Hense, Senior Portfolio Manager, Investment Grade, RBC BlueBay – Italy's figures are higher than hoped for by the European Union, in particular by the more austere Nordic states.

Italy it could still be far from a stable primary deficit, with forecasts of 1.5% and 0.5% for this year and next year, however sufficient to keep the deficit/GDP ratio stable for the moment. The only warning sign for Italy would be a loss of European Union support. However, Prime Minister Giorgia Meloni appeared decidedly less polemical than Deputy Prime Minister Matteo Salvini, Hense underlines. She aligned herself with the EU position on Ukraine and brokered European funding to support the Tunisian economy and tackle irregular migration. Italy has also expressed its intention to withdraw from China's Belt and Road initiative, while Europe develops its own global infrastructure investment project. This productive relationship should help facilitate future budget negotiations.

Falling inflation? It will take some time

“We see that Europe is in line with global markets.” Inflation – explains the expert – it's still sticky and needs time to decline, therefore, “we believe that in the near future the ECB will keep rates at 4%.” Housing cost inflation, in particular, will take time to ease, as will wage inflation, given that, in Europe, wage negotiations generally take place on a biannual basis.

Yields should therefore remain in the high range, i Italian 10-year BTP yields expected to reach 5% and the German bunds stand at around 3%. At the same time, it is GDP prospects are unlikely to improve consistently, and real growth is expected to remain in the 0-1% range. This means that investors should benefit from long-term opportunities to approach fixed income markets.

What programs for the ECB?

On a technical level, there is a question mark over the real functioning of the European debt market. In March, the ECB has completed its bond purchasesknown as investments foreseen by the Public Sector Purchase Programme, leaving some doubts about the market's ability to find a balance with supply.

The ECB will carry out a monetary review in the first quarter of 2024, hoping that it will show greater flexibility to intervene in the market from time to time. It has the Transmission Protection Instrument program available, but there would have to be a significant movement in Italian spreads to be able to reactivate it.