OECD Economic Outlook, Volume 2025 Issue 2

Italy

GDP growth is projected to pick-up slightly from 0.5% in 2025 to 0.6% in 2026 and 0.7% in 2027. Weak exports following higher global tariffs and subdued household consumption, despite rising real incomes, will drag on near-term growth. Rising public investment is projected to support growth through 2026, buoyed by accelerating disbursement of the National Recovery and Resilience Programme funds ahead of its deadline, before slowing in 2027. Improved confidence and stronger growth in export markets will support a modest pick-up in private consumption and investment, lifting growth. Risks are broadly balanced. If recent improvements in fiscal sustainability prove short-lived and interest rate spreads widen again, or weakness in key trading partners is prolonged, the outlook would deteriorate. Conversely, stronger than expected structural improvements in investment conditions could boost growth.

Further narrowing the budget deficit and stabilising the public debt ratio, in line with the medium-term fiscal‑structural strategy and European commitments, would reduce Italian borrowing costs, and support fiscal sustainability and inter-generational equity. This will require maintaining revenues, improving spending efficiency, and retaining earlier measures to contain pension expenditure. Improving the tax policy mix can support household spending and encourage employment. Greater certainty over regulations and approval processes, notably for renewable generation and transmission infrastructure, can lift private investment.

Global trade restrictions are weighing on exports and activity

GDP in the third quarter of 2025 was 0.4% higher than a year earlier. Output stagnated in the second and third quarters as weaker exports and heightened uncertainty weighed on activity and spending. Rising capital investment, buoyed by accelerating spending on the National Recovery and Resilience Plan projects, has driven output growth. Industrial production stabilised mid-year following an extended period of broadly-based falls, with output rising for most goods with the notable exception of transport equipment. Construction activity continued to grow, despite the withdrawal of various tax incentives. Household consumption volumes stalled in the middle of the year and households increased their savings rates. This was despite solid labour market conditions and rising real incomes, with employment rising by 0.7% in the year to September 2025, the labour force by 1.1% and the average wage rate by 3.3%. Labour cost increases contributed to underlying inflation, with core inflation at 2.1% in the year to October 2025. Headline inflation slowed to 1.3% over the same period, as falls in energy prices offset higher food prices.

Trade flows weakened over the first eight months of 2025, with export values holding up better than import values. Over this period, trade flows with the US rose in both directions, in part due to the front-loading of trade in anticipation of higher tariffs, while imports from China increased by 25%. The current account surplus expanded over the first three quarters of 2025 as the trade surplus widened and as interest payments on Italy’s external short-term debt fell.

Italy 1

Source: OECD Economic Outlook 118 database.

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Italy: Demand, output and prices

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Italy 2

Source: OECD Economic Outlook 118 database.

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Fiscal consolidation continues, supporting lower borrowing costs

The fiscal deficit is projected to have declined to 2.9% of GDP in 2025, following the return of the primary budget balance to surplus in 2024, mostly thanks to rising personal income tax revenues and social security receipts due to the labour market’s strength and less-than-planned spending, notably on construction incentives. The deficit is projected to decline to 2.6% of GDP in 2027 through slower growth in public investment and public payrolls. The primary budget surplus is projected to rise by 0.6% of GDP between 2025 and 2027 to 1.3% of GDP, consistent with the path laid out in the medium-term structural-fiscal strategy for a structural primary budget surplus of 2.1% of GDP by 2029. Public debt will exceed 137% of GDP in 2027 as the SuperBonus housing renovation tax credits are recorded in the stock of debt. The disbursement of the National Recovery and Reconstruction Plan (NRRP) is projected to accelerate ahead of the late 2026 spending deadlines, although other public investment may pick up in 2027, attenuating the decline in public investment following the NRRP. The draft 2026 budget aims to reduce the deficit, but lightens some taxes on employment and extends some incentives, financed through one-off and ongoing revenue sources. The budget cuts personal income tax rates for middle income earners, workers working unusual hours and with small bonus payments, expands some social benefits, and encourages renewal of low-wage contracts. It extends certain tax incentives for businesses, and tax credits for housing renovations. These measures are funded in part through extra taxes on banks and insurance companies (worth 0.2% of GDP), and by raising the lump-sum ‘flat tax’ on new residents’ foreign income by 50%.

Borrowing costs have fallen following the cuts in the euro area policy interest rate, and a lower risk premium on Italian debt. Agencies have upgraded their ratings of Italy’s sovereign debt and of some subnational governments and major enterprises, due to banks’ improved health and progress in fiscal consolidation. Easier borrowing conditions have contributed to rising credit growth, with businesses’ borrowing rising over the year to mid-2025, for the first time in over 2½ years. Monetary policy rates are expected to stabilise, but further upgrading of Italy will help attract more external financing, expanding access to credit and lowering borrowing costs to support private investment. Structural reforms, accelerated by the NRRP, are also improving investment conditions, especially in lagging regions, such as by reorganising and better resourcing judicial processes to reduce civil court backlogs and the length of proceedings.

Growth will slightly pick up with reduced global policy uncertainty

Real GDP growth is projected to pick up slightly to 0.6% in 2026 and 0.7% in 2027. Weak export growth and the effects of global policy uncertainty are expected to drag down activity into the first half of 2026, before exports and activity pick up as conditions stabilise and external demand improves. Greater certainty, improved borrowing conditions, and ongoing implementation of the National Recovery and Resilience Plan (NRRP) projects are expected to nurture greater business investment and consumer demand in 2027, offsetting the winding back in public investment spending. Inflation is expected to remain modest, as wage pressures abate with slower employment growth than in recent years.

While uncertainty is high, risks to growth are broadly balanced. Trade policy restrictions, enhanced competition from the potential deflection of trade away from the United States towards Italy, and uncertainty may create a deeper drag on exports, activity, investment and employment than anticipated, amplified by households’ increasing their precautionary savings. On the other hand, government reforms and investments, ranging from infrastructure to skill development, may encourage businesses to invest more than expected, making use of their improved balance sheets and liquidity.

Improving regulations’ clarity and implementation can support investment

Pursuing fiscal consolidation, including by maintaining policies to contain pension spending, will be necessary to start reducing the public debt burden, contain interest costs and address long-term challenges from population ageing, the climate transition and higher defence spending. Revenues can be supported by further improving collection, while shifting the tax burden from employment towards immobile property. Ensuring major new public investments undergo robust design, cost-benefit assessments and contract awarding can help continue to improve public infrastructure beyond the NRRP within the limited fiscal space. Improving regulatory and project approval processes, for example through consolidating and better coordinating across levels of government and agencies, can encourage greater private investment, especially renewable generation and transmission infrastructure. Clearer regulations less susceptible to judicial appeals would improve regulations’ enforcement and certainty for investors. Improving the clarity and certainty over business investment support programmes, including by tapering size thresholds for eligibility would encourage take-up and firms to grow.