Summary of the Report on the Italian Economy - December 2024

1. Economic Outlook

The Italian economy is projected to grow modestly, with GDP forecasts revised to 0.5% in 2024 and 1% in 2025. Growth is constrained by weak investments and exports, though consumption shows signs of recovery. Key factors include:

· Consumption: Expected to rise by 1.8% in 2025, supported by improving household purchasing power.

· Labour Market: Employment growth is driven by the over-50 demographic, while younger cohorts face stagnant job opportunities. This trend partly reflects shifts in retirement age policies.

· Investments: Residential construction declines due to reduced tax incentives, but non-residential construction benefits from infrastructure spending under the National Recovery and Resilience Plan (NRRP).

· Exports: Sluggish growth of 0.6% is anticipated in 2025, reflecting weaker demand from major trading partners such as Germany and France.

2. Sectoral Performance

· Industrial Production: Remains stagnant, with output contracting by -3.6% year-on-year in October. Capital and intermediate goods have seen significant declines.

· Manufacturing: Business confidence shows mixed signals, with PMI indices indicating a prolonged contraction. New orders, particularly foreign ones, continue to decline.

· Construction: The sector shows a divergence; residential investment contracts, while non-residential projects grow, driven by NRRP-related activities.

· Services: Although expanding, the pace of growth has slowed, with tourism-linked sectors performing better than industry-related services.

3. Consumption Trends

Consumer spending has shown resilience, primarily in services. Retail sales fluctuate, and consumer confidence has dipped recently. However, rising household purchasing power and a potential reduction in savings rates may bolster consumption in the medium term.

4. Inflation and Prices

· Inflation Trends: After declining, inflation is expected to normalize at 2% in 2025. Recent increases are attributed to higher energy and food prices.

· Core Inflation: Remains below the Eurozone average, reflecting moderate pressures on non-energy-related prices.

5. Banking Sector Trends

· Loans to Businesses: Lending to non-financial corporations remains weak, with long-term loans declining. Regulatory complexities and low demand hinder recovery.

· Home Loans: Mortgage lending has improved, supported by favorable fixed-rate conditions.

· Deposits: Growth in deposits, particularly time deposits, reflects shifting household savings behaviors.

6. Macroeconomic Forecasts

· Public Finance: The budget deficit is expected to improve to -3.3% of GDP by 2025, but public debt remains high, projected to peak at 136.9% of GDP in 2026.

· Employment: The unemployment rate has reached historic lows (5.8%) but may rise slightly as labor demand weakens.

· Trade Balance: Net exports continue to weigh on GDP growth, with imports outpacing export recovery in 2025.

7. Key Risks and Challenges

· Investments: Delays in implementing tax incentives under the "Transition 5.0" program and NRRP execution gaps pose risks.

· External Demand: Reduced growth in major trade partners and potential U.S. trade tariffs threaten export performance.

· Debt Dynamics: Despite fiscal improvements, the high public debt burden limits policy flexibility.

8. Conclusion

The Italian economy faces a delicate balancing act between domestic consumption-driven growth and external challenges. While structural reforms and infrastructure investments offer long-term promise, short-term dynamics remain vulnerable to external shocks and policy inefficiencies. Addressing these issues will be critical to sustaining recovery beyond 2025.Economic Outlook on Italy