Brandolini warns on public finance, geopolitical risks
Andrea Brandolini, Head of Economics and Statistics at Banca d'Italia, testified on Italy's Public Finance Document 2026. He highlighted macroeconomic fragilities from geopolitical conflict and discussed public account trends.
Geopolitical tremors hit global outlook
The conflict involving the United States, Israel, and Iran has significantly exacerbated global fragilities, leading to supply disruptions in the Strait of Hormuz.
This has caused a sharp increase in international hydrocarbon prices, with spot oil up 45 percent and European natural gas over 40 percent.
Italy, particularly dependent on Gulf supplies for gas and refined products, faces heightened uncertainty regarding raw material availability.
Major international organizations have revised global growth forecasts downwards, with the IMF estimating 3.1 percent for this year (down from 3.4 percent in 2025).
In the euro area, inflation rose to 2.6 percent in March, primarily due to fuel costs, and growth prospects have weakened.
The ECB projects euro area GDP growth at 0.9 percent this year, with inflation reaching 2.6 percent in 2026 before stabilizing around 2 percent in 2027-28. The Governing Council maintained official rates in March, closely monitoring the conflict's impact.
Italy's economy navigates headwinds
Italy's GDP grew 0.5 percent in 2025, but prospects sharply deteriorated following the Middle East conflict.
While manufacturing orders remain high, rising costs and supply difficulties are impacting expected operating conditions.
Consumer confidence has worsened, potentially slowing consumption.
Industrial production declined in January-February 2026, though services activity, boosted by the Winter Olympics, provided support.
Banca d'Italia's survey indicates a marked deterioration in firms' economic and foreign demand expectations, with stable investment plans for 2026 despite deteriorating conditions.
Italian inflation rose slightly to 1.6 percent in March, projected to average 2.6 percent this year, then fall below 2 percent in 2027-28. GDP growth is forecast at 0.6 percent in 2026 and 0.5 percent in 2027.
The DFP's macroeconomic framework aligns with these estimates, also outlining an adverse scenario with nearly one percentage point lower GDP growth over 2026-29.
Public accounts under pressure
Italy's deficit fell to 3.1 percent of GDP in 2025, from 3.4 percent in 2024, driven by a primary surplus of 0.8 percent.
Public investments, boosted by Recovery and Resilience Facility funds, reached a century-high 3.8 percent of GDP.
However, the debt-to-GDP ratio increased by 2.4 percentage points to 137.1 percent, influenced by a negative interest-growth differential and a large stock-flow component, including building tax credits and increased Treasury liquidity.
Net borrowing was slightly higher than anticipated.
For 2026-29, net borrowing is projected to decrease to 2.1 percent of GDP by 2029, while the primary surplus expands to 2.4 percent and interest expenditure rises to 4.5 percent.