top of page
Glass Buildings_edited_edited.jpg

Italy: where we stand now

GDP is expected to grow by 0.7% in 2024 and 1.2% in 2025. The high inflation of the last two years has eroded real incomes, financial conditions remain tense, and most of the exceptional fiscal support linked to the COVID-19 and energy crisis has been reduced, burdening private consumption and investment. The expected resumption of real wage growth and the increase in public investment linked to New Generation EU (NGEU) funds will only partially compensate for these obstacles.

The risks are substantially balanced. The main negative risk is that the downsizing of the so-called 'Superbonus' construction tax credit will trigger a greater than expected contraction in real estate investments. On the positive side, a significant recovery in public investment linked to the National Recovery and Resilience Plan (NRRP) could stimulate growth.

Temporary tax cuts and increased NRRP spending have largely offset the reduction in tax support for households and businesses, resulting in a neutral tax orientation in 2024 and a moderate fiscal tightening in 2025. This is essentially appropriate to put public finances back on a more prudent path, while at the same time avoiding further weakening of activity in a context of restrictive monetary policy and high financing costs.

The rapid implementation of ongoing structural reforms in the areas of competition, civil justice and public administration and the increase in public investment linked to the PNRRP will be key to supporting business in the short term and increasing the potential for growth in the medium term.

The business remains weak

Real GDP grew 0.2% in the fourth quarter of 2023, supported by strong real estate investments before the downsizing of the “Superbonus” tax credit at the end of the year, while private consumption contracted. Recent indicators signal modest growth in the short term. Although consumer confidence has improved in recent months, manufacturing production, retail sales and business confidence remain weak. Despite the slowdown in growth in 2023, the unemployment rate remains historically low and collectively negotiated wage growth has increased by around 3%, which is expected to support household incomes and private consumption in the coming quarters.

The fall in energy prices over the course of 2023 was rapidly transmitted to consumer price inflation, which fell from more than 12% in November 2022 to 1.2% in March 2024. The stabilization of energy prices in recent months suggests that inflation will be driven primarily by internal factors in the short term. The tightening of global financial conditions has so far had limited negative repercussions on the health of the Italian banking sector, which has benefited from increased profitability thanks to the increase in net interest margins.

The high financial burdens weigh on the activity

Financing costs for households and businesses increased significantly in the wake of the tightening of monetary policy in the euro area, with interest rates on loans to non-financial corporations reaching about 5.3% in February. Lending standards remain tight, despite some easing in recent months, and loan growth remains negative. High interest rates have also increased debt service costs for the government, despite the recent decline in the risk premium on Italian government bonds, with public interest payments expected to reach about 4% of GDP in 2024-25.

The fiscal policy stance will be substantially neutral in 2024, with a modest tightening expected in 2025. Recent changes to Eurostat's national accounting rules imply that accrual expenditure on the creation of tax credits, including the 'Superbonus', will decrease by about 3% of GDP in 2024, explaining much of the improvement in the tax balance. Despite the considerable improvement in the tax balance, tax policy will not suffer a tightening in 2024. The planned elimination of energy policy support measures – which will amount to about 1% of GDP – will be largely offset by lower income taxes due to the merger of the first and second income tax brackets, the targeted reduction in social security contributions for low- and middle-income households and the expected increase in spending on Next Generation EU (NGEU) funds.

Inflation will remain low as growth will only resume modestly

Real GDP is expected to grow by 0.7% in 2024 and 1.2% in 2025. The harsh financial conditions, the erosion of real incomes due to modest wage growth in a context of high inflation and the gradual elimination of exceptional fiscal support linked to the energy crisis will result in growth weighing on private consumption and investment.

Background inflation is expected to decline gradually over the course of 2024 in the wake of rising unemployment and moderate nominal wage growth.

The risks to growth are substantially balanced. The main downside risk is that the downsizing of the “Superbonus” building tax credit triggers a greater than expected contraction in real estate investments, which were a key source of growth in the 2021-23 period. On the other hand, the acceleration of public investment linked to the National Recovery and Resilience Plan (NRRP) could stimulate growth in 2024 and 2025.

The full use of NGEU funds implies that public spending must be increased from about 1% of GDP in 2023 to about 2.5% of GDP on average in the period 2024-26.

To bring the debt-to-GDP ratio back on a more prudent path, tax adjustments and structural reforms are needed

The government deficit will shrink but remain above 3% until 2025, the government debt ratio is high, and there are significant pressures on spending stemming from investment needs and the costs of ageing. A broad and lasting fiscal adjustment will be needed over several years to cope with future pressures on spending, while at the same time bringing the debt-to-GDP ratio back on a more prudent path and respecting the new EU fiscal rules.

Full implementation of public investment and structural reform plans under the PNRR could significantly raise Italy's GDP, which would have the additional advantage of exerting further downward pressure on the debt-to-GDP ratio.

Progress with structural reforms has been substantial, but the expenditure of NGEU funds lags behind the original programme, which mainly reflects delays in the implementation of public investment projects.

The priority should now be to strengthen the implementation capacity of public administration, especially at regional and municipal level.

Market brief is part of OTB NEWS

1 view0 comments

Recent Posts

See All


bottom of page