OECD Economic Outlook, Volume 2026 Issue 1

Italy

GDP growth is projected to remain at 0.5% in 2026, as the renewed energy price shock weighs on household consumption, investment and exports, offsetting the impetus from the rising disbursement of the National Recovery and Resilience Programme funds. The surge in energy prices will lift inflation, unwinding recent gains in real wages. In 2027, retreating energy prices and reduced uncertainty will lift growth to 0.6%. Italy’s outlook is relatively exposed to the evolving conflict in the Middle East, given the high share of energy sourced from imported fossil fuels and the importance of exported manufacturing production.

Pursuing fiscal consolidation while pursuing a comprehensive programme of structural reforms to raise productivity and employment will help to start reducing the debt burden and improve the economy’s resilience to external shocks. Ensuring energy price support measures are temporary and targeted towards vulnerable households and firms will limit the harm from the shock while containing fiscal costs. Pursuing planning and approval reforms to hasten investments in renewable energy generation and transmission can reduce energy costs and vulnerability to elevated fossil fuel prices.

The energy price surge has undercut the economy’s improving momentum

The economy’s momentum was gradually improving in late 2025 and early 2026, before the surge in energy prices and instability undercut confidence. GDP expanded by 0.2% in the first quarter of 2026 compared with the previous quarter, supported by rising investment and expanding production related to pharmaceuticals and the energy and digital transitions. Into 2026, firms reported improving orders, while the rising disbursement of National Recovery and Resilience Programme (NRRP) funds bolstered construction activity and tax incentives supported housing investment. The Milano Cortina Winter Olympics temporarily boosted services activity and exports. Employment growth has moderated, but a decline in labour force participation reduced the unemployment rate to 5.3% in February 2026, near historic lows. The outbreak of the conflict in the Middle East prompted a sharp deterioration in consumer and business confidence. Energy price increases lifted the harmonised year-on-year inflation rate to 2.8% in April. Core inflation has moderated to 1.6% as services price growth eased.

Export volumes weakened in late 2025, notably to euro area markets and to the United States, before recovering somewhat in early 2026, although exporters’ outlook for orders was pessimistic and worsened following the outbreak of the Middle East conflict. Energy-intensive manufacturing and exports are significant for overall production, and Italy has been more reliant than other major euro-area countries on refined petroleum and natural gas (one-quarter and 11% of total supply respectively) supplied through the Strait of Hormuz, and the energy trade balance deteriorated in March with higher international prices. US tariffs are diverting exports of large emerging-market economies, heightening competitive pressures in domestic and foreign markets for Italian manufacturers in sectors such as in toys, electronics, rubber and plastics, and machinery.

Italy 1

Source: OECD Economic Outlook 119 database.

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Italy: Demand, output and prices

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Italy 2

Source: OECD Economic Outlook 119 database.

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Gradual fiscal consolidation continues

Gradual fiscal consolidation continues, with the budget deficit narrowing to 3.1% of GDP in 2025, although at a slightly slower pace than anticipated in the 2026 budget. Increased receipts, notably social security contributions, supported the fiscal balance. Net primary expenditure rose as share of GDP, in contrast with the Medium-Term Fiscal-Structural Plan that implies a declining ratio. Accelerating implementation of the NRRP lifted public investment above 3.8% of GDP, the highest rate in 35 years. Public debt rose to over 137% of GDP in 2025, with the rise partly due to the ongoing effects on cash flow from previous years’ generous building renovation tax credits. To abate the effects of Italy’s relatively high energy prices, exacerbated by the evolving Middle East conflict, the government has reduced fuel excise tax rates and extended a series of targeted transfers to low-income households and firms in sectors highly exposed to high fuel costs such as road haulage, agriculture and fishing. The measures are limited by end dates or financing allocations, and are partly financed through increased taxes on energy companies, higher VAT receipts and ETS revenues, and by reduced funding to some ministries.

Overall, financing conditions were broadly stable in late 2025 and early 2026 and private sector lending growth remained modest. Costs of new loans to firms fell, while those to households, which are generally fixed rate, rose, reflecting higher long-term bond yields. Following the outbreak of the Middle East conflict, interest costs rose with market yields and spreads on government bonds widening modestly.

Growth is weighed down by external developments

Output growth is expected to remain modest at 0.5% in 2026, as the renewed increase in energy prices and uncertainty weigh on households’ consumption and businesses’ production and investment. Rising public investment with accelerating disbursement of the NRRP funds will support activity, especially in construction and associated manufacturing sectors. Employment growth is likely to slow, although the rise in the unemployment rate is likely to be limited as fewer adults are entering the labour force. In 2027, household spending and external demand are likely to pick up as energy prices and geopolitical uncertainty subside, lifting GDP growth to 0.6%. The pick-up is held back by weak income growth, with real wages recovering few of their losses from higher consumer prices due to the limited renewals of collective agreements scheduled for 2027 and continued slack in the labour market.

Risks to the outlook are substantial and are tilted to the downside given Italy’s relatively high exposure to the Middle East conflict. The high public debt exposes the economy to global financial market volatility and increased risk premiums which may follow higher global inflation. Conversely, government investments and reforms to improve the business environment, investment and skill development, accelerated by the NRRP, may encourage businesses to invest more than expected, making use of their improved balance sheets and liquidity, and attract more adults into the labour force.

Fiscal consolidation alongside ambitious structural reforms would lift prospects

Pursuing the planned fiscal consolidation laid out in the Medium-Term Fiscal-Structural Plan (MTFSP) would reduce the debt burden, refinancing needs and interest costs, and lessen the economy’s vulnerability to financial market volatility. As spending pressures are rising from population ageing, climate change and defence, achieving the planned consolidation will require improving public spending effectiveness and integrity, and curbing high pension spending. Improving tax compliance can fund reforms to make the tax system more growth-friendly, enabling reductions in the tax burden for individual taxpayers, particularly low-wage workers. Pursuing a comprehensive programme of structural reforms, building on the NRRP and the MTFSP, to raise productivity and employment and raise incomes, would also support fiscal sustainability. Improving school-to-work transitions, adult and vocational training, as well as reforming labour market policies would help to better engage youth in the workforce, while expanding parental leave earmarked for fathers could encourage take-up and reduce barriers to women from working. While the productivity of Italy’s larger producers is high, many firms are small with low productivity. Increasing competition from emerging-market economies is being heightened by trade diversion following international trade policy restrictions. Continuing to streamline and provide greater stability in government support to businesses, reduce regulatory and tax compliance burdens, scale-up support for innovative research and development, and encourage the professionalisation of firms’ management would help firms raise their productivity and grow. Accelerating the development of renewable energy sources and electrifying energy use would reduce Italy’s exposure to volatile fossil fuel prices and supply uncertainty, and could lower energy costs. This requires pursuing ongoing reforms to simplify and anticipate planning approvals across the multiple layers of public bodies, and ensuring that pricing policies, including measures to support vulnerable users, encourage improved efficiency, the shift away from fossil fuels and further investment in the sector.