Real GDP growth is projected to grow by 0.5% in 2024, before picking up modestly to 0.9% in 2025 and 1.2% in 2026. The sharp disinflation witnessed in recent quarters, combined with solid wage gains, is expected to underpin consumer spending, while looser financial conditions and the rollout of public investment tied to New Generation EU (NGEU) funds should stimulate capital formation. The risks to the outlook are largely balanced. On the downside, a sharper-than-anticipated contraction in residential investment, driven by the wind-down of building tax credits, and weaker export demand due to slower growth across the euro area could dampen prospects. Conversely, a stronger-than-forecast surge in public investment linked to the National Recovery and Resilience Plan (NRRP) may bolster economic performance.

Borrowing costs for households and businesses are set to fall as euro area monetary policy eases. However, the boost to household consumption and investment will be tempered by the moderately restrictive fiscal stance over 2025-26. The planned fiscal consolidation, aimed at putting the public finances on a more sustainable path in the medium term, strikes a balance between fiscal prudence and maintaining growth momentum, but additional measures will be needed in 2026 to meet these goals. The timely implementation of the NRRP, particularly in ramping up public investment, should support economic activity in both the short and medium term. Structural reforms will be essential to address emerging labour shortages amid rapid population ageing, with key areas for reform being the expansion of public early childcare and the enhancement of technical tertiary education to bring more women and young people into the labour market.

Real GDP has grown modestly over first three quarters of 2024. While resilient household consumption and robust business investment supported activity, residential investment continued to contract, reflecting the wind-down of the generous Superbonus building tax credit earlier this year. High-frequency data suggests that near-term growth will pick up only gradually. While the services sector and consumer confidence have been stable, manufacturing output and sentiment are showing signs of softening. Despite sluggish GDP growth over the past year, the unemployment rate has steadily declined and labour shortages remain elevated, especially for specialised construction workers. Collectively bargained wages have grown by about 4%, bolstering household incomes and private consumption.

Falling oil prices on global markets over the past months have kept consumer price inflation in check, bringing it down to 1% in October. However, as energy prices stabilise, this disinflationary force will fade, with inflation increasingly shaped by domestic factors. The easing of global financial conditions, following monetary policy loosening in several key economies, is gradually filtering through to lower borrowing costs for households, businesses, and the government.

Euro area monetary policy easing is lowering borrowing costs for households and businesses, although interest rates on loans to non-financial corporations remained around 5% in September and lending growth continues to be negative. Lending standards have eased in recent months, but they remain more stringent than before the energy crisis. Debt servicing costs for the government remain elevated, despite recent declines in the risk premium on Italian government securities, with government interest payments expected to remain around 4% of GDP over 2025-26.

The stance of fiscal policy will shift from broadly neutral in 2024 to moderately restrictive over 2025-26 consistent with the government’s medium-term fiscal plan. In 2024, the projected phase-out of energy policy support measures – amounting to a fiscal tightening of about 1% of GDP – is broadly offset by lower income taxes due to the merging of the first and second income-tax brackets, the targeted reduction in social security contributions for low- and middle-income households and the expected ramp-up of spending related to Next Generation EU (NGEU) funds. Fiscal consolidation in 2025 will amount to about ½ per cent of GDP, which mainly reflects lower expenditure on building tax credits, the temporary suppression of tax deferrals for banks, as well as spending review-related savings. Compliance with the draft medium-term structural fiscal plan submitted to the European Commission is assumed to require fiscal consolidation of ½ per cent of GDP in 2026.

Real GDP is projected to grow by 0.5% in 2024, 0.9% in 2025 and 1.2% in 2026. In the near term, restrictive financial conditions and the wind-down of the Superbonus building tax credit will continue to weigh on private consumption and investment, especially in the construction sector. As borrowing costs decrease on the back of euro area monetary policy loosening, the labour market will strengthen and real wages will continue to recover, supporting private consumption. Coupled with the ramp-up in public investment related to the National Recovery and Resilience Plan (NRRP) to meet targets by mid-2026, activity is expected to gather pace, despite moderate fiscal tightening. Inflation is expected to gradually pick up to around 2%, as downward pressure from declining energy prices fades and robust wage gains despite weak productivity growth prevent core inflation from declining further.

Risks to growth are broadly balanced. The main downside risk is that the wind-down of the Superbonus building tax credit triggers a larger and more persistent contraction in housing investment, which has been a key source of growth over 2021-23. Slower growth across the euro area could further dampen prospects by tempering export demand. On the upside, the acceleration in public investment related to the National Recovery and Resilience Plan (NRRP) could boost growth in 2025-26 more than expected. The full utilisation of New Generation EU funds implies that NRRP-related spending needs to be ramped up from about 1% of GDP in 2024 to about 2½ per cent of GDP on average over 2025-26.

The government deficit is set to narrow under the government’s medium-term fiscal plan, dipping below 3% by 2026. However, the public debt ratio will continue to rise from already elevated levels and a large primary surplus will be required over the medium term to put the debt ratio on a more prudent path. At the same time, fiscal pressures are mounting, driven by investment demands and rising pension costs associated with an ageing population. The government’s expansion of public investment tied to the National Recovery and Resilience Plan (NRRP) and its move to make tax and social security cuts permanent are positive developments, but they necessitate offsetting measures, either through spending cuts or tax rises elsewhere. While short-term consolidation plans rely primarily on unwinding one-off and temporary measures, achieving medium-term fiscal adjustment will require bold action to curb pension spending growth; raise property taxes, including by aligning the property register with market values; tackle tax evasion; and conduct thorough spending reviews. While notable progress has been made on structural reforms, addressing labour shortages – exacerbated by rapid demographic changes – requires heightened attention. Encouraging higher female workforce participation by continuing to expand public early childcare services would help. Boosting apprenticeships and enhancing technical tertiary education could help tackle the high proportion of young people who are not in education, employment or training.