Middle East conflict darkens global, Italian outlook

The conflict between the United States, Israel, and Iran has aggravated an already strained international scenario, marked by ongoing geopolitical and trade tensions.

The closure of the Strait of Hormuz, a crucial channel for global energy supplies, has led to a sharp increase in oil and natural gas prices, affecting consumer price inflation in the euro area and the United States as early as March.

This greater uncertainty immediately reflected in financial markets, with sovereign yields and risk premiums rising, equity prices falling, and the dollar appreciating.

While a temporary ceasefire announcement on April 8 eased tensions, persistent uncertainty about the effective reopening of the Strait and the conflict's duration drove energy prices back up.

The IMF expects world growth to slow to 3.1 percent in 2026, with a more adverse scenario seeing it drop to around 2 percent.

The euro-area economy decelerated in late 2025 and early 2026, with March ECB staff projections forecasting 0.9 percent GDP growth for 2026, a downward revision from December.

Italy's GDP increased in the fourth quarter of 2025, supported by housing investment but tempered by slowing household consumption.

Banca d'Italia estimates indicate continued, albeit slow, expansion in the first quarter of 2026.

However, the Middle East conflict's risks were incorporated into Banca d'Italia's April projections, which foresee GDP growth of 0.5 percent in both 2026 and 2027, and 0.8 percent in 2028.

Export volumes declined, and the current account surplus narrowed in late 2025, mainly due to a drop in the merchandise trade surplus.

Employment increased, and the unemployment rate declined in winter months, though labor market participation decreased for most groups.

Inflation in Italy remained below the euro-area average in Q1 2026, but fuel prices rose sharply in March.

Banca d'Italia projects consumer price inflation to rise to 2.6 percent in 2026 before falling below 2 percent in the following two years.

Lending rates for firms declined slightly, while mortgage rates edged up, with banks' credit standards remaining stable.