Economic Bulletin No. 4 - 2025

The global economy continues to be affected by international trade tensions

The trade deals signed by the United States with the European Union and other trading partners are setting out a new framework for trade relations. The situation is still unfolding and the uncertainty over trade policies continues to weigh on the outlook for the global economy in the medium term. The higher tariffs contributed to a decline in international trade in the second quarter, in line with the expectations of the main observers. The effects on the US economy have been limited so far, with GDP returning to growth, albeit with a weakening labour market. The Chinese economy continues to be held back by slack domestic demand. According to the projections of the International Monetary Fund, global growth over 2025-26 will be lower on average than it was last year.

Euro-area GDP growth is subdued

In the spring months, euro-area GDP decelerated sharply due to the fading of the extraordinary boost in US demand that had sustained it in the first quarter, as a result of the frontloading of purchases ahead of tariffs taking effect. According to our estimates, GDP growth was subdued in the summer as well. The most recent European Central Bank staff projections point to euro-area GDP increasing by just over 1 per cent per year on average over the three years 2025-27. Consumer price inflation has stood at around 2 per cent since May; it is expected to decline slightly in 2026, and then to return to levels not far from the target in 2027.

The ECB keeps the key interest rates unchanged

At its July and September meetings, the ECB Governing Council kept its key interest rates unchanged. The cost of credit to firms declined further between May and August, owing to the pass-through of the previous easing of monetary policy. Despite this decline, loan growth remained moderate, reflecting weak demand and trade tensions. The latter in particular led to a shift in the composition of loans from long to short maturities.

The Italian economy returns to growth in the summer months

Italy's GDP fell slightly in the second quarter, owing to the sharp decline in exports, as was the case in other euroarea countries. According to our estimates, the Italian economy returned to growth in the third quarter, albeit to a modest extent. The further increase in investment - thanks to more favourable borrowing conditions, tax incentives and NRRP measures - was accompanied by a slight rise in consumption, driven by improved household confidence and resilient labour income. Activity grew in services and construction, while it remained weak in manufacturing.

The current account surplus expands

According to our estimates, goods export volumes returned to growth in July and August, after shrinking in the spring. The current account surplus on the balance of payments grew between April and June. Demand for Italian securities by foreign investors strengthened further. Italy's net international investment position remains largely positive, although it has declined because of the depreciation of the dollar against the euro.

Employment stabilizes

Employment remained broadly unchanged in the second quarter, while hours worked per capita increased slightly. The participation rate rose again among older workers, but declined among younger ones; the unemployment rate remains low across all age groups. Growth in negotiated wages slowed, though it is still higher than inflation. Employment remained stable in the summer months and wages continued to slow.

Inflation remains subdued

Inflation remained just below 2 per cent in the third quarter, with its core component standing at similar levels, as very weak growth in non-energy prices was offset by greater price increases in services. Food prices accelerated due to temporary effects that are expected to fade in the coming months. Producer price growth remains subdued.

Lending to firms returns to growth

Policy rate cuts continued to be passed through to the cost of bank funding and lending to firms. Lending to non-financial corporations picked up, with a return to growth in services and a softer decline in industry. Bank surveys suggest that demand for corporate loans strengthened, with no tensions on the supply side. Lending to households accelerated.

Net borrowing is projected to fall to 3 per cent of GDP

According to the Public Finance Planning Document 2025 approved by the Italian government on 2 October, net borrowing is projected to fall to 3 per cent of GDP in 2025, before edging down to 2.3 per cent in 2028. Public debt is set to continue to expand, reaching 137.4 per cent of GDP in 2026, and then to go down by around one percentage point over the following two years.

Italy's GDP is set to benefit from growth in domestic demand

According to our projections, Italy's GDP will increase by 0.6 per cent in 2025 and 2026, and by 0.7 per cent in 2027. This scenario takes into account the trade deals between the United States and the European Union and the lower degree of uncertainty over trade policies. GDP growth will be driven by investment; consumers will remain cautious this year, although later on they will respond to the rise in disposable income. Foreign demand will be affected by higher tariffs and the appreciation of the euro. Consumer price inflation is projected to stand at 1.7 per cent in 2025 and to decline to 1.5 per cent in 2026, before bouncing back to 1.9 per cent in 2027.

The forecasting scenario is subject to considerable uncertainty, stemming largely from potential new developments in trade policies and the ongoing conflicts. Growth could be affected by concerns over the outlook for the public finances across the euro area and in other advanced economies. On the other hand, an expansionary fiscal stance at European level, particularly in connection with a significant increase in defence spending, could boost economic activity.