Economic Bulletin No. 3 - 2025

Global growth is weighed down by high uncertainty and instability

The international environment is burdened by ongoing political instability and conflicts. Trade policies continue to be affected by great uncertainty, fuelled by a flurry of announcements, suspensions and disputes, as well as by the unpredictable outcomes of the negotiations between the United States and its main trading partners. This is taking a toll on global economic activity.

GDP contracted in the US in the first quarter of 2025, falling for the first time in three years. Imports of goods rose sharply driven by firms frontloading their foreign purchases in anticipation of higher tariffs, which were then announced on 2 April.

However, according to the available indicators, the resulting acceleration in global trade is expected to be short-lived. China is showing the first signs of weakening exports, as economic activity continues to be held back by subdued domestic demand and the real estate market crisis. The OECD revised its global GDP growth forecasts downwards again.

The US dollar depreciates

Global equity prices more than recouped the losses incurred following the 2 April announcements, partly owing to the temporary suspension of the tariffs. In the United States, the rise in risk premiums - driven by a downgraded sovereign credit rating and the worsening outlook for public finances - contributed to the increase in ten-year government bond yields until the end of May; their subsequent decline is partly attributable to expectations of a more accommodative monetary policy stance. The dollar depreciated, with investors appearing less inclined to hold some US dollar-denominated assets than in previous episodes of financial turmoil. The euro strengthened and yields decreased in the euro area, especially in countries where fiscal consolidation has supported greater demand for government securities.

Recent developments in euro-area GDP reflect trends in US imports

Economic growth in the euro area exceeded expectations in the first three months of 2025. GDP growth was driven by the frontloading of exports to the United States in anticipation of higher tariffs. Euro-area activity weakened in the spring months, as strong US demand waned and domestic demand was still held back by high uncertainty.

According to the latest Eurosystem staff macroeconomic projections - which assume that the tariffs temporarily applicable until 9 July will remain in effect beyond that date - euro-area GDP is set to grow by 1 per cent on average over 2025-26. Consumer price inflation, which was 2 per cent in June, is projected to remain consistent with the medium-term target across the three-year forecasting horizon. Instability in trade policies and in the geopolitical scenario is the main risk factor for the growth and inflation outlook.

The ECB cuts its key interest rates

The ECB Governing Council further reduced its deposit facility rate by 50 basis points overall in its April and June meetings, bringing it to 2.0 per cent. The total reduction of 200 basis points since the start of the monetary policy easing cycle in June 2024 is still passing through to the cost of credit.

Economic activity in Italy continues to grow

Italy's GDP grew by 0.3 per cent in the first quarter compared with the previous period, owing to higher consumption and investment and, to a lesser extent, to US demand. After a protracted downturn that began in 2022, the manufacturing sector started showing signs of improvement, although it remains exposed to the instability of the international environment. According to our assessments, GDP slowed in the second quarter. Moderate growth in household consumption and investment spending, dampened by low confidence and heightened uncertainty, was accompanied by weaker foreign demand. Activity increased in both industry and services.

According to our latest projections, GDP is set to grow by 0.6 per cent in 2025 and by around 0.8 per cent on average in the following two years. The forecasting scenario is subject to considerable uncertainty, mainly linked to how geopolitical and trade tensions evolve.

Foreign demand for Italian government bonds remains strong

The current account balance remained positive in the first quarter, in line with the average levels recorded in 2024. Export volumes increased, partly reflecting the frontloading of purchases by US importers. According to our estimates, exports of goods declined in April and May. Foreign investors continued to make substantial net purchases of Italian government bonds. Italy's net international investment position remains highly positive.

Employment continues to grow

Employment continued to grow in the first quarter of 2025 (by 0.7 per cent compared with the autumn quarter). The number of hours worked rose in services and construction, but not in manufacturing, where recourse to short-time work schemes increased slightly again. The unemployment rate is at historically low levels and the labour force participation rate rose further. Contractual wages grew faster than inflation, but they are still below their 2021 levels in real terms. Employment continued to rise in the second quarter, to a lesser extent, while wage growth weakened slightly.

Inflation remains subdued

Inflation hovered around 2 per cent in the spring, as did its core component, which reflected very weak price growth for non-energy goods and stronger increases in service prices. The inflation expectations of households and firms continued to be moderate. According to our projections, consumer price inflation will average 1.5 per cent in both 2025 and 2026, before returning to 2 per cent in 2027.

The cost of credit continues to decline

The reduction in key interest rates continued to be transmitted to the cost of bank funding and to the cost of credit. The contraction in loans to non-financial corporations eased but remained significant for small firms. Credit demand was still subdued, while supply policies continued to reflect a cautious stance due to heightened uncertainty about the economic outlook. Exporting firms reduced their reliance on longer-term loans, which are typically used to finance investment in capital goods and to expand production capacity.

European Commission positively assesses Italy's corrective path for its excessive deficit

Based on the updated estimates contained in the 2025 Public Finance Document from last April, developments in net expenditure are consistent with the target agreed at European level. In its European Semester Spring Package, published in early June, the European Commission issued a positive assessment of Italy's corrective path under the excessive deficit procedure.