Italy

Italy recovered solidly from the pandemic and turned out one of the best performers among the four major Eurozone economies. But though GDP is now 5.6% above pre-pandemic levels (vs. EZ GDP 4.6%), economic activity has slowed down in recent quarters, and even stagnated (in real quarterly terms) in Q3 2024. Private consumption growth resumed in 2024 as confidence slowly recovered alongside the strong decline of inflation. However, the massive investment rebound experienced in 2021-23, supported mainly by the Superbonus tax credit and to a lesser extent by the inflow of NGEU funds, reversed course in 2024. Looking ahead, we expect private consumption to pick up further as income recovers and monetary policy eases, while a catch-up in NGEU spending should make up for the partial recovery of investment activity. In 2025, we expect GDP to expand by +0.8%, followed by +1% in 2026.

The sustained decline in prices has provided some breathing room to the outlook. Negative base effects remained the main driver of decreasing energy inflation, and Italy’s inflation rate (1.0% in 2024) is now one of the lowest in the Eurozone (below the ECB’s 2% target). However, we expect a rebound in the short term, given the volatility of energy prices and strong base effects playing out. Inflation in expected to gradually return to target in 2026, after reaching 1.7% y/y in 2025. Core inflation has embarked on a solid downward trend and has been below 2% since June 2024.

The labor market improved further in the course of 2024, but a slight deterioration is expected in 2025 as signs of easing have emerged. The number of people employed stayed at a record high and the number of inactive is at historic low levels, while the number of unemployed people has picked up slightly in recent months. The unemployment rate decreased sharply to 5.7% in November 2024 (from 7.5% a year earlier) but is set to deteriorate slightly in 2025 due to the lagged effects of the current economic slowdown. Moreover, structural weaknesses remain. Italy has one of the lowest female labor force participation rates in the Eurozone and the lowest employment rate. This would require major policy interventions to (i.e. supply of childcare facilities) to reinforce women’s presence in the labor force. Also, productivity is on a downward trend and demographic challenges are also adding pressure.

Business insolvencies resumed after 2020 but remained well below pre-pandemic levels. Monetary policy tightening and the rapid pass-through to corporate financing costs pushed up the number of insolvencies in 2024. In particular, the trade sector together with manufacturing and construction saw the largest increases in 2024, given persistent falling demand and ongoing global challenges.

Italy is set to receive EUR194bn of NGEU funds (EUR122.6bn in loans and EUR71.8bn in grants) to boost growth. The efficient implementation of NGEU-related reforms and timely allocation of funds, coupled with a strengthened administrative capacity, will be decisive and should kick off a sustained path towards the  green transition and digital transformation. The results-based approach, organized into milestones and targets, incentivizes methodical planning and facilitates more efficient implementation.

Reforms are the main benefit from the RRF. On 7 August 2023, Italy submitted its amended recovery and resilience plan, which includes a REPowerEU chapter. The modified plan has a strong focus on the green transition, devoting 39% of the available funds to measures that support climate objectives, and reinforces Italy's digital preparedness and maintains its important social dimension. Italy already received EUR122bn linked to the fulfillment all the relevant milestones and targets and submitted the seventh payment request for EUR21bn in December 2024.