Moody's cuts Italia's GDP: impact of Middle East war on growth and inflation

"Considering the military conflict in the Middle East, we slightly lowered our real GDP growth forecast for 2026 from 0.8% to 0.7% and increased our inflation forecast from 1.8% to 2.1%. Our baseline scenario assumes a relatively time-limited conflict, in which Italy's real GDP growth would reach 0.8% in 2027 and inflation 2%. We remain of the view that the path of gradual fiscal consolidation outlined in the medium-term fiscal framework is credible and achievable. That said, Italia's growth prospects are sensitive to a more adverse scenario of prolonged conflict, reflecting its relatively high exposure to energy imports from the Gulf region." Moody's writes this in its periodic review of Italia's ratings.

"Italy's ratings, including its long-term issuer ratings (Baa2) with stable outlook, are supported by the country's economy, which is characterised by its large size, diversification and high incomes, a solid domestic investor base that supports public financing, and a policy framework anchored by its membership in the European Union and the euro area," Moody's explains.

These strengths are 'offset by Italy's very high public debt, which limits fiscal flexibility, moderate growth prospects in the medium term, weighed down by an unfavourable demographic environment and weak productivity dynamics, and high sensitivity of public finances to changes in financing conditions'. The agency adds that 'macroeconomic and fiscal developments have been in line with our expectations since our last rating action in November 2025. Real GDP growth reached 0.5% in 2025, down from 0.8% in 2024, reflecting weaker foreign demand and tighter financing conditions, partly offset by resilient domestic demand."

"Labour market conditions continued to improve, with the unemployment rate falling to 6.1% in 2025 from 6.6% in 2024, supporting private consumption and tax revenues. The budget deficit was 3.1% of GDP in 2025, after 3.4% in 2024, and the primary balance improved from a surplus of 0.5% of GDP in 2024 to 0.7%. The higher-than-expected revenue growth reflects a positive structural impact of recent reforms supporting tax compliance. That said, expenditure growth was also stronger than expected, mainly due to the transitory and non-structural impact of residual payments under the superbonus tax credit scheme. As a result, the debt burden rose to 137.1 per cent of GDP from 134.7 per cent in 2024, slightly more than we expected,' Moody's adds. The stable outlook 'balances Italy's credit strengths and challenges.

On the positive side, reforms to improve the efficiency of the public sector and the business environment in general could lead to a more substantial improvement in Italia's growth prospects, with a positive impact on public finances. On the negative side, the reduction of Italy's high debt burden depends on relatively robust GDP growth and an increase in primary budget surpluses. This means that slower growth or a less pronounced fiscal consolidation than currently projected would undermine our projections of a reduction in the debt burden'.