Insights
August 4, 2025
Italy: Moving forward
PERSPECTIVES Special | Authors: Daniel Sacco, CESGA Investment Officer EMEA, Alberto Bianchi, Investment Officer EMEA
Key takeaways
• The shift from an investment-driven expansion to an economy supported mainly by private consumption will pose some challenges ahead.
• US foreign policy initiatives have multiple implications for Italy. Defence spending could provide a European growth boost but the agreed-upon 15% tariff rate between the EU and the US is significantly higher than before President Trump's second term.
• Italian bond spread compression is likely to survive debt sustainability concerns. Sector composition may continue to provide a tailwind for Italian equities.
Contents
Conclusions
The Italian economy has outperformed most of its Eurozone peers in recent years, although momentum may ease in coming years as an investment boom driven by NGEU funds and construction spending fades away. It will need to shift toward a more consumption-driven economy – a shift that is not without risks, especially with the significant increase of the US import tariffs on EU goods. EU countries, however, could benefit strengthening the Union’s internal market, which still has untapped potential even 30 years after its inception as trade barriers within the EU are substantial.The IMF suggests that reducing existing trade barriers to the level of the US could increase EU productivity by almost 7 percentage points (ppts) in the long term.This would halve the current productivity gap between advanced EU economies and the US, significantly increasing Europe's potential growth. In the medium term, the Italian government is likely to remain effective in fulfilling milestones and targets set out in its domestic NRRP to receive the latest tranches of NGEU funds, which will contribute to the long-term productive capacity of the economy. Italy is also set to benefit from ongoing fiscal changes at European level (e.g. rising defence spending).
Domestic capital markets have continued to do well versus other European markets in 2025, FTSE MIB performance helped by specific drivers such as sector composition. Expected earnings growth in coming years remains solid for now with relatively low valuations. This outperformance could be further boosted by global investors’ shifting focus out of the US in favour of the European markets.
Italian government bond spreads vs. Bunds have tightened significantly. Across Europe, debt sustainability concerns could re-emerge especially if US tariffs prompt a material economic slowdown, leading to some risk-off movements among EGBs-Bund spreads. However, the Italian government appears to be on a credible path toward fiscal consolidation and ongoing changes in the European fiscal landscape may offer support to BTP-Bund spreads in particular, likely keeping them in a tighter range. Although we do not forecast any further spread tightening, the still attractive carry opportunity offered by BTP remains a supportive factor for investors.
Further links on the topic
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