Italy’s recovery has gained momentum, supported by domestic demand

Investment and net exports have disappointed, though, suggesting Italy needs to improve its business environment and enhance external competitiveness further. The domestic demand-led recovery is expected to continue, as tailwinds fuelling the cyclical rebound remain effective. GDP is likely to rise by 0.8% this year and 1.4% next. Authorities' strong policy implementation has supported the return of private sector confidence. 

Risks are broadly balanced at this stage. On the upside, higher-than-expected private consumption and investment could push growth above the forecasts. On the downside, exports may slow more than expected, although only exports to Russia and, to some extent, Brazil have slowed, while those to China remain resilient and close to an all-time high. 

Implementation of structural reforms, including a second round of labour market reforms, remains essential to enhance competitiveness. Unit labour costs (ULC) remain on a rising trend. Given Italy has only limited room to lower nominal wages, it should boost productivity. Hourly labour costs already occupy a mid-range position compared to more competitive economies. The government should follow up on its plan to improving the wage bargaining system at the local level. This would help align nominal wage growth to productivity and accelerate the reduction in ULC.  

"We expect the government to remain committed on its intention to deliver a second round of labour market reform, but we flag the risk that rising political frictions within the ruling PD party and perhaps early-stage electoral considerations may slow the implementation of the measure", says Barclays.