Economic Bulletin No. 2 - 2026

The war in the Middle East is worsening the global economic outlook

The conflict between the United States, Israel and Iran has aggravated an international scenario that is already under strain due to the ongoing geopolitical and trade tensions. The closure of the Strait of Hormuz, a crucial channel for the global supply of natural gas, oil and other essential raw materials, has led to a sharp increase in energy prices and raised concerns about their availability in the near future. Consumer price inflation in the euro area and in the United States was affected as early as March.

The greater uncertainty was immediately reflected in the financial markets: sovereign yields and risk premiums rose, equity prices fell and the dollar appreciated against the major currencies.

Uncertainty remains high

The announcement on 8 April of a two-week ceasefire led to a temporary drop in oil and natural gas prices. Subsequently, uncertainty about the effective reopening of the Strait of Hormuz to maritime traffic and whether the ceasefire will hold drove energy prices back up to high levels. The unpredictability of the consequences of the conflict has heightened the risk of market corrections, adding to those stemming from potentially lower profitability expectations for the technology sector.

The risk of a slow and partial restoration of supply chains and the rising insurance and shipping costs make a swift return of energy prices to pre-conflict levels unlikely, and weigh on the outlook for the global economy, even more so if damage to production and refining infrastructures proves to be significant.

Global growth slackens

In the United States, economic activity at the end of 2025 was still supported by investment in artificial intelligence technologies, but was held back by the government shutdown. In China, GDP growth continued to be driven by exports. According to the IMF, world growth, which had been less affected by the trade tensions than initially anticipated, is expected to slow to 3.1 per cent in 2026 but to go down to around 2 per cent in a particularly adverse scenario; world trade contracted in the fourth quarter of 2025 and is expected to slow further in 2026.

Economic activity slows in the euro area

The euro-area economy decelerated in the fourth quarter of 2025 and in the first few months of 2026. The conflict made the outlook worse and more uncertain. According to the March ECB staff projections, euro-area GDP is projected to grow by 0.9 per cent in 2026, and by about 1.3 per cent per year on average in each of the following two years, with a cumulative downward revision of almost half a percentage point compared with the December projections. Consumer price inflation is expected to rise to 2.6 per cent in 2026 and then to stabilize close to the 2 per cent target over the following two years. In a particularly unfavourable scenario, inflation could exceed 4 per cent in 2026-27, while economic growth is projected to decline to about half a percentage point this year, before picking up gradually in the following two years.

The ECB keeps the key interest rates unchanged

At its March meeting, the ECB Governing Council kept the key interest rates unchanged and stressed that it will monitor the situation closely, assessing the consequences of the conflict in the Middle East for the inflation outlook. Between November and February, the cost of borrowing for firms remained stable, while that of mortgage loans increased slightly. Looking ahead, the increase in market rates following the outbreak of hostilities could generate upward pressures. Lending to firms weakened slightly, reflecting still low demand and tighter credit standards; loans to households instead continued to increase moderately, driven above all by loans for house purchase.

Economic activity in Italy expands at a moderate pace

Italy's GDP increased in the fourth quarter. Housing investment continued to grow, boosted by tax incentives for renovation, while household consumption slowed, reflecting concerns about the general state of the economy. According to our estimates, GDP continued to expand in the first quarter of this year, albeit at a slow pace.

The risks to economic activity caused by the conflict in the Middle East were incorporated into Banca d'Italia's projections published in April. In the baseline scenario, GDP is projected to grow by 0.5 per cent both this year and the next, and by 0.8 per cent in 2028. Uncertainty over these projections is exceptionally high. In an adverse scenario, prepared for illustrative purposes, protracted hostilities in the Middle East could dampen growth by about half a percentage point this year and by 1 point next year compared with the baseline scenario.

The current account surplus decreases

Export volumes declined and the current account surplus narrowed in the last quarter of 2025, mainly owing to the decline in the merchandise trade surplus. In January and February, exports went up, also benefiting from the boost to services generated by the Winter Olympics. The rise in imported energy prices will lead to a deterioration in Italy's energy balance.

Employment increases, but labour market participation decreases

Headcount employment increased and the unemployment rate declined further in the winter months. Labour market participation decreased, except for older workers. Wage growth in the non-farm private sector remained stable at low levels and higher than inflation.

Inflation remains moderate, but will increase in the short term

Inflation in Italy remained below the euro-area average in the first quarter of the year. The conflict in the Middle East led to a marked increase in fuel prices in the first weeks of March, but has not yet affected electricity and gas tariffs. The impact of higher energy prices on the consumer price index will become apparent in the coming months. In the baseline scenario of our projections, consumer price inflation is expected to rise to 2.6 per cent in 2026, before returning to below 2 per cent in the following two years. In the adverse scenario, inflation is projected to rise to 4.5 per cent this year, to 3.3 per cent in 2027 and to 2.2 per cent in 2028.

The rise in market rates following the start of the conflict could affect financing conditions

Lending rates for firms declined slightly between November and February, while those for mortgage loans edged up. Banks' credit standards remained stable and demand for loans increased. If the rise in market rates observed after the outbreak of the war were to persist, it could tighten financing conditions and curb demand for loans.

Net borrowing as a share of GDP falls, while the debt-to-GDP ratio rises

General government net borrowing as a share of GDP declined in 2025. The debt-to-GDP ratio increased, partly owing to the delayed effects of tax credits for building renovations and to the sizeable increase in the Treasury's liquid balance. The Government introduced some temporary measures in March and April in response to the rise in energy prices.