Economy shrinks in the second quarter

Second reading confirms that GDP fell in Q2: A second release confirmed that seasonally and calendar-adjusted quarter-on-quarter GDP dropped 0.1% in the second quarter, contrasting the 0.3% expansion seen in the first quarter and marking the first drop in two years. On an annual plus seasonally and calendar-adjusted basis, economic growth eased to 0.4% in Q2 from the previous quarter's 0.7% increase, marking the softest growth rate since Q1 2024.

Export frontloading fades and domestic demand remains tepid: Domestically, the sequential contraction reflected a stagnation in private consumption during Q2 (Q1: +0.2% qoq s.a.), which likely reflected a deceleration in real wage growth. Moreover, fixed investment growth edged down to 1.0% in Q2, following the 1.1% rise logged in the previous quarter. That said, public spending rebounded, growing 0.2% in Q2 (Q1: -0.3% qoq s.a.). On the external front, exports of goods and services contracted 1.7% in Q2, marking the worst result since Q2 2020 (Q1: +2.1% qoq s.a.), as frontloading to dodge U.S. tariffs cooled. Meanwhile, imports of goods and services growth waned to 0.4% in Q2 (Q1: +1.3%). Overall, net exports weighed negatively on the overall reading.

GDP to rebound in H2: Our panelists forecast sequential GDP growth to resume in the second half of the year, aided by the impact of the ECB’s interest rate cuts on fixed investment. Even so, overall economic momentum is set to remain downbeat, with the 15% U.S. tariffs on EU goods from August likely to weigh on the external sector. Looking at 2025 as a whole, economic growth is projected to broadly match 2024’s rate. Household consumption growth should accelerate—supported by a falling unemployment rate—and fixed investment should recover, driven by lower financing costs and inflows of EU funds; however, public spending will be constrained by the European Commission’s excessive deficit procedure, limiting the extent of Italy’s economic growth. The pace of EU funds absorption will remain a critical factor to watch.

Panelist insight: Commenting on the outlook for private consumption, ING’s Paolo Pizzoli stated: “Whether there will be some catch-up in consumption in the second half of the year, which we still deem possible, will depend on developments on the employment and on the inflation fronts. Labour market forward-looking indicators continue to point to a marginal increase/stabilisation of employment through the end of the year and inflation developments remain favourable, continuing to support further gains in real disposable income.”

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