Italy Economic Forecast

GDP dodged a technical recession in Q1, as both the external sector—thanks to a strong Easter season—and domestic demand fueled growth. Household spending likely continued to expand, benefiting from stronger consumer sentiment, although still-high inflation should have limited the scope of the increase. Additionally, business sentiment improved notwithstanding tight financing conditions, which should have underpinned investment activity. Meanwhile, the government recently confirmed a reduction of its fiscal deficit target to 4.5% for 2023. Moreover, it approved tax cuts to employees with low to middle incomes, loosened rules on short-term job contracts and scaled back a ‘citizen wage’ unemployment benefit. Lastly, on 21 April, S&P maintained Italy’s rating outlook as stable, citing an expected decline in public debt as a positive factor but highlighting risks of failing to deliver critical reforms.

Harmonized inflation fell to 8.0% in March (February: 9.9%) due to a sharper fall in prices for regulated energy products and a softer rise in prices for non-regulated energy products. Inflation should continue to decline ahead amid softer domestic demand and tighter financing conditions. The evolution of the euro’s strength and commodity prices are key factors to watch.