Italy

Italy is expected to regain some momentum, thanks to recovering domestic demand. While GDP is now 6.6% above pre-pandemic levels, economic activity has slowed down in recent quarters.  Consumption is expected to hold up, supported by favorable trends in household purchasing power and relief from lower interest rates. While investment has been constrained by prolonged uncertainty, it will continue to benefit from the roll-out of NGEU-funded projects and the gradual improvement in financing conditions. Italy has so far received two-thirds of the EUR194bn allocated under the program (equivalent to 26% of the total Recovery and Resilience Facility and 10.8% of Italian GDP). We expect the economy to have expanded by a modest +0.6% in 2025, with growth picking up to +0.8% in 2026 and +1.0% in 2027. 

The sustained decline in prices has provided some breathing room to the outlook. Negative base effects from energy remained the main driver of declining inflation, and Italy’s inflation is now below the ECB’s 2% target. Inflation averaged 1.5% in 2025 but we expect a rebound in the short term, given the volatility of energy prices and strong base effects. Inflation is expected to gradually return to target in 2027.  

The labor market has remained resilient despite multiple headwinds, but employment gains are expected to soften after strong improvements. Looking ahead, unemployment is projected to remain broadly stable around current levels through 2026-2027. Wage growth is expected to moderate gradually below 3%, in line with subdued inflation expectations and the need to safeguard competitiveness in a more challenging trade environment. Moreover, structural weaknesses persist; 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 the presence of women in the labor force. Also, productivity is on a downward trend and demographic challenges are intensifying. 

Italy's business environment faces structural challenges. Bureaucratic procedures and administrative complexity can slow business operations, while the justice system, though improving through recent reforms, still takes longer than EU peers to resolve commercial disputes. The tax system remains complex despite simplification efforts, and labor market regulations are gradually being modernized to address skills mismatches and reduce the high tax wedge. Some services sectors would benefit from increased competition, and infrastructure investment is progressing, particularly through NGEU funding. Access to finance for SMEs is improving as capital markets develop, though bank lending remains dominant. In this context, NGEU provides a significant opportunity to accelerate structural improvements through reforms and investments focused on digitalization, the green transition, and modernization. With sustained implementation, these efforts can enhance productivity, strengthen FDI attractiveness, and support Italy's competitive positioning in key manufacturing and services sectors.