Italy: sustaining the unsustainable

GDP and GDP per head

Italy ranks 10th out of the G20 in terms of total GDP at market exchange rates (US$2.7 trillion estimated for 2026). On PPP terms its GDP is larger, because the IMF estimates that the euro is undervalued against the US dollar, but its ranking drops to 14^th out of the G20 (because emerging economies receive an even larger boost on a PPP basis). In terms of per capita GDP, Italy ranks 8^th and 10^th, respectively, in market exchange rates and PPP measures. On the latter measure, Italy is 70% of the US level.

Demographics and potential growth

The overall population and the proportion aged 16-64 are both expected to decline over the next 25 years. This will constrain the economy's ability to grow. We estimate potential GDP growth (taking into account these demographic trends and productivity) to be only around 0.5% p.a. over the next 15 years. Recent actual and prospective growth are broadly in line with this potential. GDP grew by 0.5% in 2025 and the IMF's April 2026 reference forecast (which sees a relatively quick end to the Iran war) sees the same rate in both 2026 and 2027. If oil prices remain around $100/barrel, GDP growth could be hit by as much as 0.5% in 2026, taking growth to zero.

Inflation

Headline and core CPI inflation have been less than 2% for almost all of the last two years.  If oil prices stay at around $100/barrel, inflation could easily be pushed up to 3% or higher. However, broad money growth remains quite weak, suggesting underlying inflation (i.e. excluding the effect of energy price shocks) will remain broadly in line with the eurozone 2% target. Outstanding private sector credit has declined relative to GDP since 2020. The risk of a rapid rise in private sector credit, as was seen in the pandemic, seems small.

Fiscal Position

Italy’s government debt level is, and has been for a long time, high – well over 100% of GDP. But it is likely to be broadly stable over the next 5 years. Italy has been good at deft manipulation of its public finances for a number of years. It has sustained the unsustainable. The budget deficit is expected to be under 3% this year and it seems likely Italy will exit its EU Excessive Deficit Procedure in 2026. The procedure was launched when the deficit reached 7.4% in 2023.

External Position

External position looks fine, with a small current account surplus and net foreign assets which have increased in recent years.

Governance, Competitiveness and Emissions

All of the main governance and competitiveness indicators are a concern. However, Italy's perceived corruption score has improved over the last 10 years. Italy has relatively low emissions per head but the trend is only slowly declining and Italy is not on track to reach net zero by 2050.

Currency

The euro is undervalued on the basis of the IMF’s PPP measure but is overvalued on both the raw and the GDP-adjusted Big Mac measures. The latter suggests Italy’s competitiveness is hampered by too strong an exchange rate.