OECD Economic Outlook, Volume 2025 Issue 1

Italy

GDP growth is expected to slow slightly to 0.6% in 2025 and pick up to 0.7% in 2026. Global trade policy disruptions are expected to drag on growth. Higher real wages are set to support consumer demand. Investment will be boosted by accelerated implementation of National Recovery and Resilience Plan (NRRP) projects. Export volumes are poised to stagnate in 2025 due to more restrictive trade policy settings and sluggish demand in key European markets. Downside risks dominate, including the uncertain response of investors and employers to global policy developments. Faster implementation of NRRP projects or stronger export demand from other European countries would bolster growth.

Continuing fiscal consolidation is projected in 2025 and 2026, as the government remains committed to reducing the fiscal deficit and putting the public finances on a sustainable medium-term path. Progress implementing the NRRP should encourage greater private investment and employment in the medium term. Sustaining living standards in the longer term will require improving opportunities for graduating youth and older workers to update their skills to meet the needs of the labour market.

Weaker industrial production has weighed on GDP growth

GDP expanded by 0.7% in 2024, with weak growth in the second half of the year. Export volumes fell. Industrial production was 1.8% lower in March 2025 than a year earlier and has fallen for over two years. The weakness is broadly-based, with motor vehicles and parts production especially weak. Investment has been dragged by lower housing construction with the winding-down of the generous Superbonus building tax credit from early 2024. Private consumption was buoyed by support to disposable incomes from rising employment and wages and moderate underlying inflation. The unemployment rate was 6% in March 2025, near its lowest rate since prior to the global financial crisis.

Italy is exposed to more restrictive US trade policy through higher tariffs on EU goods. Over 10% of Italy’s total goods exports in 2023 went to the United States. Moreover, the indirect effects may be significant, for example through global motor vehicle production chains or weaker demand globally. Italy is also exposed to growing competition from Chinese industrial products. Volatility in international energy prices has been transmitted into consumer prices. Higher gas prices in early 2025 contributed to headline inflation rising to 2.0% in the year to April 2025. In response, the government introduced a new support programme targeting lower income households. The fall in gas and petroleum prices in March and April 2025 is passing into producer and consumer prices.

Italy 1

Source: Istat; and OECD Economic Outlook 117 database.

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Italy: Demand, output and prices

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Italy 2

Source: Bank of Italy; and OECD Economic Outlook 117 database.

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Fiscal consolidation continues alongside implementation of the NRRP

The fiscal deficit fell to 3.4% of GDP in 2024, 0.4 percentage points lower than the government had budgeted. A modest reduction is projected for 2025 and further consolidation in 2026, in line with the medium-term structural fiscal plan submitted to the European Commission. These are projected to reduce the headline budget deficit by 0.6% of GDP. The ramp-down in spending on the building tax credit is supporting consolidation, alongside positive revenue developments and some savings in ministries’ spending. The government expects these to be sufficient to offset planned income tax cuts and tax bracket consolidation, as well as planned increases in spending, including on health care and investment. The government also plans small increases in defence and national security spending, and to accelerate public investment spending, although this will mainly be in 2026. The improvement in the budget balance may be more modest than the government’s projections given the weakening growth outlook and increased pressures for defence and other spending. Italy has continued to make progress on implementing the reforms in the National Recovery and Resilience Plan and spending rates have increased.

Lower euro area interest rates are passing into lending and deposit rates. Household borrowing demand started rising in early 2025, although businesses continued to reduce their borrowing. Long‑term government bond yields were broadly stable from mid-2024 to May 2025, while spreads relative to equivalent German government bond yields declined to about 105 basis points in mid-May 2025, after averaging around 125 basis points over the previous six months. Still, the government expects the interest cost of public debt to rise.

Global trade policy developments will drag on the recovery in GDP growth

Real GDP growth is projected to slow to 0.6% in 2025 and pick-up slightly to 0.7% in 2026. New global trade restrictions are expected to result in export volumes contracting slightly in 2026 – the first contraction since the global financial crisis (excluding the pandemic). Exports are expected to resume growing in 2026 as other European countries increase their investment and defence spending. Consumer demand is expected to remain resilient, despite the increased economic uncertainty, as real wages are supported by firm employment and wage growth and moderate inflation. Investment is set to grow with the accelerating disbursement of NextGenerationEU-funded projects, while residential construction spending returns to longer-term average levels with the withdrawal of the Superbonus tax credits. Other business investment is poised to remain weak, despite lower financing costs, due to uncertainty over the global economic and policy environment. Headline inflation is set to ease as the increase in energy and fresh food prices fades, while underlying inflation will rise moderately with ongoing wage growth.

Risks to growth are tilted to the downside due to the uncertainty created by global trade policy developments. New or retaliatory trade restrictions or more prolonged weakness in demand in the euro area may lead to a deeper contraction in exports than expected. Uncertainty over policy may lead to firms cutting investment and recruitment plans by more than expected and households cutting their expenditure to build precautionary savings. On the upside, more of the public investment projects funded through the National Recovery and Resilience Plan (NRRP) could be implemented than expected over 2025 and 2026.

Raising the economy’s potential while proceeding with fiscal consolidation will support investment

Achieving the planned fiscal consolidation will be necessary to ensure public debt is on a prudent path and to contain interest expenses. The high share of spending on pensions and rising spending pressures from ageing, climate and defence needs in the medium term require significant reforms. Raising property taxes and addressing tax evasion, and containing pension spending despite demographic pressures, can create room for public investment. Ensuring effective and timely disbursement of NextGenerationEU-funded projects will boost near-term demand and improve the investment climate into the longer-term. Simplifying the authorisation procedures for renewable energy and associated electricity grid investments would reduce the dependence on natural gas, lower energy costs and accelerate electrification. Bolstering the labour force will be central for private investment prospects. Improving school leavers’ readiness for the workforce, such as by boosting apprenticeships and advanced technical education, would help support the size and skills of the workforce, and improve the attractiveness of staying in Italy for young adults. Women’s participation would be raised by continuing to expand public support for care for children and other dependents. Expanding access to reskilling opportunities for adults to extend their working lives will also help address demographic challenges and the labour force’s needs.