Italy flag Italy: Economic and Political Overview

The economic context of Italy

Economic Indicators

Italy's economy was heavily impacted by the global financial crisis and only emerged from recession in 2015; however, the country was one of the most affected by the COVID-19-induced crisis, with growth returning to its pre-pandemic levels by Q2/2022. For 2023, the IMF estimated growth at 0.7% (from 3.7% one year earlier): after contracting by 0.4% q-o-q in the second quarter and being null in the third, the economy resumed growing as from the fourth quarter. Among the causes of the slowdown, there were the lingering impact of ECB monetary tightening, which persisted in affecting the borrowing costs of households, businesses, and the government. Real incomes have been undermined by sluggish wage growth and elevated inflation. Moreover, diminished demand for housing, coupled with the reduced backlog of projects approved under the discontinued "superbonus" tax scheme, has restricted construction activity, which had been the main key driver in the recent past. The growth rate is expected to remain unchanged in 2024 (0.7%), increasing marginally to 1% the following year thanks to the sustained rise in capital spending, which should be only partially influenced by a continued decline in housing investment.

The country’s primary budget (which excludes interest payments) is structurally positive; however, the interest cost on the government’s debt weighs heavily on Italy’s accounts, with the general government budget being constantly in deficit. In 2023, the IMF estimated the general government deficit at 2.1% of GDP (5.3% as per the EU Commission projections), as the diminished budgetary expense for measures addressed to contain the effects of high energy prices (1% of GDP, down from 2.4% in 2022) and housing tax credits (1.8% of GDP, down from 2.8%) was somewhat counterbalanced by elevated pension expenditures due to indexation to the 2022 inflation and a rise in investment. The IMF expects the deficit to hover around 3.4% of GDP over the forecast horizon. Italy has one of the highest debt-to-GDP ratios in the world: estimated at 147.3% in 2023, it should go down to 142.8% by 2025. Being a net importer of energy, Italy’s inflation was pushed by rising global energy costs, going beyond 8% in 2022 and to 6% in 2023. A gradual decline in inflation throughout 2024-25 is expected (to around 2.6%), driven by the reduction in energy prices and moderate growth in nominal wages.

Even in the face of a deceleration in economic activity, the unemployment rate – at 7.9% in 2023 - remains historically low. Employment continues to experience strong growth, and nominal wage growth has increased to approximately 3%. This is expected to bolster household incomes and contribute to sustained private consumption, with the unemployment rate remaining largely unchanged. Italy has high levels of youth unemployment (22% as of Oct. 2023 according to ISTAT), and regional inequalities between the highly industrialised and dynamic North and the poorer, rural southern “Mezzogiorno” areas are still evident. Furthermore, Italy has to face a falling birth rate and a declining population. Italy’s GDP per capita (PPP) was estimated at USD 54,259 by the IMF in 2022, just below the EU-27 average (USD 56,970).

 
Main Indicators 20222023 (E)2024 (E)2025 (E)2026 (E)
GDP (billions USD) 2,012.012,186.082,284.082,365.542,443.49
GDP (Constant Prices, Annual % Change) 3.70.70.71.01.1
GDP per Capita (USD) 34,08537,14638,92640,43741,902
General Government Balance (in % of GDP) -1.9-2.1-3.4-3.4-2.7
General Government Gross Debt (in % of GDP) 144.4143.7143.2142.8141.9
Inflation Rate (%) n/a6.02.62.22.0
Unemployment Rate (% of the Labour Force) 8.17.98.08.18.2
Current Account (billions USD) -24.5215.2619.7628.9836.44
Current Account (in % of GDP) -1.20.70.91.21.5

Source: IMF – World Economic Outlook Database, October 2021

Main Sectors of Industry

Italy is one of the main agricultural players in the EU, being the biggest European producer of rice, fruits, vegetables and wine. The agricultural sector represents 1.8% of Italian GDP and is heavily reliant on the import of raw materials utilised in agricultural production due to the country’s limited natural resources (Italian imports of raw materials are responsible for more than 80% of the country’s energy). The primary sector employs 4% of the workforce (World Bank, latest data available), and is comprised of around 1.3 million farms of which almost half have a small agricultural output (European Commission). The country has 12.8 million ha of agricultural land and its main crops include cereals (particularly wheat), corn, barley, rice and oats. Italy is also the first world producer of wine and the first producer of tobacco in Europe. According to figures by ISTAT, in contrast to the rest of the national economy, the added value of the agriculture, forestry, and fishing sectors decreased by 1.8% in real terms in 2022. There was also a decline in the production volume (-1.5%) and employment (-2.1%). Among EU countries, Italy is the second in terms of added value and the third for production value.

Italy is a primary industrial country, with the secondary sector accounting for 23.8% of GDP and employing 27% of the active population (World Bank, latest data available). The country’s industrial activity is concentrated in the northern part of the country, including cities such as Turin, Milan and Venice. Much of the Italian industry is comprised of small and medium-sized family businesses, with the majority of Italian industrial companies having less than 50 employees. Italy is the largest global exporter of luxury goods (clothing, cars, etc.); other major Italian industries include precision machinery, motor vehicles, chemical products, pharmaceuticals, electrical items, fashion and clothing. The manufacturing sector alone accounts for 15% of GDP (World Bank). The country has suffered from deindustrialisation (especially during the global financial crisis), but it remains Europe's second-largest manufacturing power and the seventh-largest worldwide. ISTAT reports that in the first nine months of 2023, industrial production decreased by 2.7% compared to the same period in 2022. There was a significant decline in energy (-7.3%) and consumer goods (-3.5%), mainly due to the reduction in the production of durable goods (-6.1%). Capital goods showed an increase in production by 3.5%, while intermediate goods declined by 5.7%. For non-durable consumer goods, production decreased by 3.2%.

The service sector constitutes almost two-thirds of Italian GDP (64.3%) and employs 69% of the country’s workforce. Tourism - one of the fastest growing and most profitable industries - comprises the largest part of the service sector (Italy is the fifth most visited country internationally and the third most visited in Europe): according to the national statistical agency ISTAT, tourism and its related activities generate around 6% of the economy’s added value. Business-related services also play an important role in the country’s economy. It is estimated that more than half of Italy’s 5 million companies are active in the tertiary sector. According to Istat, in Q3 2023, the quarter-on-quarter variation in the turnover of services returned into positive territory (+0.9%) after the negative result recorded in Q2.

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 4.1 26.6 69.3
Value Added (in % of GDP) 2.0 23.0 64.8
Value Added (Annual % Change) -1.8 2.0 4.7

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
64,9/100
World Rank:
68
Regional Rank:
36

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
6.57/10
World Rank:
39/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024

 

Country Risk

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Latest Update: February 2024

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