Italian economy faces slower growth, higher inflation amid conflict uncertainty
Banca d'Italia staff project Italy's GDP to grow by 0.5 percent in 2026 and 2027, rising to 0.8 percent in 2028. Consumer price inflation is set to reach 2.6 percent in 2026 before falling below 2.0 percent in subsequent years.
Conflict casts shadow on Italian growth
Banca d'Italia staff project Italy's Gross Domestic Product (GDP) to expand by 0.5 percent in both 2026 and 2027, accelerating to 0.8 percent in 2028.
This outlook is significantly influenced by the ongoing conflict in the Middle East, which is assumed to drive commodity prices higher and increase uncertainty.
Consumer price inflation (HICP) is forecast to rise to 2.6 percent in 2026, primarily due to surging commodity prices, before moderating to just below 2.0 percent in 2027 and 2028.
Compared to December's projections, GDP growth has been revised downwards by about half a percentage point across the three-year period, largely reflecting the impact of increased energy costs.
Economic activity is expected to be constrained by weaker domestic demand, particularly in 2026, due to energy price hikes, heightened uncertainty, and deteriorating confidence.
A gradual strengthening is anticipated in 2027 and 2028 as inflationary pressures ease.
Domestic demand and investment face headwinds
Borrowing conditions are expected to worsen over the projection horizon.
Household consumption growth will remain weak in 2026 and 2027, affected by real income erosion and waning confidence, before regaining momentum in 2028.
Investment, particularly in machinery and equipment, is set to slow considerably due to reduced profitability, a weaker demand outlook, and higher financing costs.
However, construction investment continues to benefit from National Recovery and Resilience Plan (NRRP) project completion.
Exports are anticipated to be held back by weak global trade initially, then gathering pace.
Employment growth will slow, and the unemployment rate is expected to edge up over the next three years after reaching historical lows.
A fragile recovery
These projections underscore Italy's vulnerability to external shocks, particularly the Middle East conflict's impact on commodity prices.
The downward revision of GDP growth highlights a fragile recovery, heavily reliant on easing inflation and successful NRRP project completion.
This high uncertainty and potential for an adverse scenario means the outlook remains precarious.