Italy's economy expanded by 0.9 per cent in 2023, and by the first quarter of 2024, real GDP had surpassed pre-global financial crisis levels, the IMF reported. Private consumption and investment, reinforced by tax incentives for home renovations and capital equipment purchases, have largely driven this recovery. The report highlights that inflation in Italy has seen a sharp decline, primarily due to falling energy prices, with core inflation also moderating. The labour market has improved, with employment rising alongside economic activity, though skill shortages have become more pronounced. Despite fiscal deficits larger than pre-COVID levels, Italy has managed to reduce its public debt ratio, aided by strong nominal GDP growth and the delayed recording of tax credit liabilities. Looking ahead, the IMF projects that Italy's growth will average around 0.75 per cent from 2024 to 2026, with disinflation continuing during this period. The EU-financed National Recovery and Resilience Plan (NRRP) is expected to support investment, offsetting declines in residential investment. Inflation is anticipated to fall below the 2 per cent target in 2024 but is expected to return to target levels thereafter. However, the IMF warns of several risks that could impact Italy's growth prospects, including the potential intensification of regional conflicts, slowdowns in major trading partners, increasing geoeconomic fragmentation, and higher-than-expected interest rates that could raise concerns about sovereign-bank-corporate linkages. Additionally, incomplete NRRP spending and reform implementation, along with persistent fiscal deficits, could undermine investor confidence and weaken public finances. The IMF also pointed out structural challenges facing Italy, such as low fertility rates and female labour force participation, which could accelerate population and workforce declines in the future. The report emphasises the need for continued structural reforms to sustain economic growth and address long-term demographic challenges.
