The new protectionist measures are making the outlook for global growth worse
At a time of exceptionally high geopolitical uncertainty, global economic activity is showing signs of a slowdown. Growth has weakened in the United States and is struggling to strengthen in China. On 2 April, the US administration announced a drastic increase in tariffs on almost all other countries, which have been calculated based on their trade surplus with the United States. This marks a sharp break from the policies followed so far, which could have serious consequences for the global economy and international cooperation. The expansion in world GDP, which the OECD had already revised downwards in its projections before 2 April, could be significantly impacted by the tariffs' direct and indirect effects and by the uncertainty arising from the tight trade policies.
The reaction of the financial markets is very negative
The announcement of new tariffs sparked a rapid and sharp correction on international financial markets: share prices recorded heavy losses, especially in those sectors most exposed to world trade. The considerable increase in volatility spurred investors to reallocate their portfolios towards safer assets. Unlike past episodes of intense market turbulence, the dollar has depreciated against all the major currencies. The prices of oil and natural gas have fallen sharply, anticipating a drop in demand. On 9 April, the US administration announced a three-month suspension of tariffs, during which a reduced rate of 10 per cent will be applied to all trading partners, except for China. The financial markets have partially recouped the falls recorded since 2 April, but an atmosphere of high uncertainty persists.
Euro-area GDP growth is moderate in the first quarter
According to the available data, euro-area GDP continued to rise moderately in the early months of the year, buoyed by ongoing growth in consumption, against weak investment in capital goods. GDP benefited further from the uptick in services and from the recovery in manufacturing activity, which is expected, however, to be affected by the uncertainty stirred up by US trade policies. Inflation fell, to just above 2 per cent. The ECB staff projections published in March, which did not take account of the tariffs imposed on the European Union by the US administration, pegged euro-area growth at 0.9 per cent in 2025 and slightly higher in the next two years, while inflation is projected to decline and to stabilize at around 2 per cent in early 2026.
The ECB lowers its key interest rates again
In its January and March meetings, the Governing Council of the ECB lowered its deposit facility rate further, by 50 basis points in total, bringing it to 2.5 per cent, 150 basis points below where it was at the peak reached in June 2024. Markets expect further cuts of between 75 and 100 basis points overall in 2025. The previous reductions are being passed through smoothly to the cost of lending. However, credit growth in the euro area remains subdued.
GDP grows moderately in Italy
According to our estimates, Italy's GDP posted modest growth in the early months of the year. Economic activity was driven by consumption, which in turn was helped by stable employment and by rising wages. However, investment in capital goods remained weak, in part due to low levels of capacity utilization and to still tight credit conditions. Economic activity was supported by services; manufacturing improved slightly, but looking ahead, it may suffer from the effects of the new tariffs and, more generally, from global instability. In construction, the impetus provided by the gradual completion of the National Recovery and Resilience Plan (NRRP) projects offset the decline in the residential sector, which followed the phasing out of the generous incentives for energy-efficient building renovations.
The current account surplus expands
The current account surplus increased in the fourth quarter of 2024, benefiting from the improvement in the goods balance. Foreign investors continued to buy Italian government securities. Goods exports began to grow again in the first two months of the year, likely driven in part by purchases being brought forward before the US tariffs take effect. Looking ahead, exports will be affected by the tariff increases, although the sectoral composition, quality ranking and good profitability of Italian firms present in the US market could mitigate the consequences of the drop in demand from the US, at least in the short term.
Employment returns to growth at the start of the year
After stagnating in late 2024, employment rose again in the early months of this year, along with the activity rate. The unemployment rate fell further, especially among young people. Wage growth is expected to remain strong in 2025, contributing to the still partial recovery in households' purchasing power. However, wage pressures are expected to ease in the future.
Inflation remains subdued
In the early months of 2025, higher energy prices caused inflation to rise slightly, to 2.1 per cent in March. Price increases in services, which exceed the overall inflation rate, are gradually declining. The Government's 'Bills Decree' introduced relief measures to soften the impact of energy cost increases for households and firms. Firms expect to increase their prices modestly this year.
The cost of lending continues to decline
The cut in key interest rates is being passed through to the cost of bank funding and credit, in line with historical regularities. However, loans to firms have continued to decline on a twelve-month basis, particularly for relatively smaller firms. This is a reflection of weakened demand overall (although it is rising slightly), widespread use of internal financing and still cautious credit access conditions, especially for small firms. Lending to households continues to gain strength.
Net borrowing decreases significantly
In 2024, general government net borrowing was more than halved compared with 2023, thanks to the sizeable improvement in the primary balance, which turned positive for the first time since 2019. The phasing out of the Superbonus was the primary contributing factor. By contrast, the debt-to-GDP ratio, which had previously been heavily affected by the cash impact of this incentive, increased slightly, to 135.3 per cent.
Tougher tariffs heighten the risks for the growth outlook
According to our projections published on 4 April and reported in this Bulletin, Italy's GDP will grow by 0.6 per cent this year, 0.8 per cent next year, and 0.7 per cent in 2027. The forecasting scenario includes an initial and necessarily limited assessment of the impact of the tariffs announced on 2 April by the United States but does not consider the impact of any retaliatory measures, of the effects that could arise from the international financial markets or of the temporary and partial suspension announced on 9 April. GDP growth will be hobbled by foreign demand because of the tariffs; however, it will be buoyed by the expansion in consumption, fostered by the good performance of real income. Investment will benefit from the measures set out in the NRRP but will be hindered by the uncertainty connected with trade tensions and by the continuing effects of the phasing out of residential building incentives. Consumer price inflation is projected to remain at around 1.5 per cent in both 2025 and 2026, and then to rise to 2.0 per cent in 2027.
These projections could be affected by potentially harsher repercussions stemming from the tightening of trade policies. Growth could be particularly hard hit by possible retaliatory measures, by fresh waves of uncertainty, and by protracted tensions on the financial markets, which could lead to a sharp slowdown in foreign demand and a waning of consumer and business confidence.
