Bank of America (BofA) economists indicated that Italy's period of economic growth outperformance is coming to an end. The Italian economy, which has seen its GDP growth surpass the regional average post-pandemic, is now expected to align with the Euro area (EA) average by 2025/26.
This projection comes despite a current cyclical recovery and the ongoing implementation of the recovery and resilience plan (RRP). The shift from a capital expenditure (capex)-driven recovery, propelled by Superbonus and RRP-related infrastructure spending, to one driven by private consumption is a significant change in the dynamics of Italy's economic growth.
BofA analysts point out that, with construction expected to contribute less to GDP, private consumption will likely become the main driver of recovery this year and into the next. This transition suggests that the composition of Italian growth will realign with the regional average.
BofA also raised concerns regarding emerging signs of weakness in the Italian labour market and among consumers. The analysts warn of a lower structural labour market potential that could affect the country's potential output.
Additionally, they note signs of an uneven distribution of the real income recovery across different income groups, with recent inflationary developments disproportionately affecting lower-income groups. This uneven recovery has been recognized by Italian consumers.
Investors are expected to continue comparing Italy's economic performance with that of core Euro area countries. BofA emphasizes the need to distinguish between cyclical performance and fundamental economic health.
While Italy may still exhibit stronger cyclical momentum relative to core EA countries, its distinct macroeconomic fundamentals could leave it more exposed to vulnerabilities.
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