As Italy approaches 2026, the political and fiscal environment is considered more stable than before, yet the market remains cautious. A report by Bank of America Global Research identifies six key unresolved questions that will continue to influence investors' confidence and pricing of the Eurozone's third-largest economy.
Overall Background: Six Question Marks Under a Stable Narrative
The core judgment of the report is: although the macro narrative has improved, the determining factor for risk premium remains "whether growth can be realized." In other words, stability is a necessary condition, but not sufficient alone to sustain optimistic market expectations.
1) Consumption: Will Households Spend Once Inflation Subsides?
The report lists "whether household consumption can rebound" as the most pressing issue. Data shows that by the third quarter of 2025, Italy's consumption level was only about 2 percentage points above pre-pandemic levels, while in other Eurozone regions this figure was about 4.8 percentage points higher; the cumulative increase over the past four quarters was about 90 basis points.
Bank of America notes that the increase in real income due to declining inflation has been converted more into savings than spending, with the savings rate rising to 14.1%, the highest since 2021, reflecting that uncertainty still suppresses the willingness to consume.
2) Strong Employment, Weak Productivity: Is the "Highlight" of the Labor Market Sustainable?
The second focus is the resilience of the labor market. The report mentions an unemployment rate as low as 5.7%, with employment rates also fairly stable.
However, the issue lies in productivity: output per hour is about 2.2% lower than pre-pandemic levels, while other Eurozone areas have seen similar growth. Bank of America believes this is related to employment expansion flowing more into low-productivity sectors, especially construction.
3) Recovery and Resilience Plan: Can Funds Be Delivered On Time and In Full?
The third variable is the execution progress of Italy's "Recovery and Resilience Plan." The report states that by the end of 2025, Italy had used about 49% of the total allocated amount, with about 10 billion euros still to be deployed; the actual expenditure in 2024 only reached 43% of the planned level.
The updated timeline shows that spending equivalent to about 1.6% of GDP may be delayed until after 2026. The report also warns that the final tranche of funds, about 28 billion euros, looks more challenging to be disbursed.
4) Fiscal and Deficit: Tightening Confirmed, But Debt Pressure Still Accumulating
The fourth pillar is public finance. The report points out that Italy's 2026 budget continues a tightening approach, with net expansion measures less than 0.1% of GDP; meanwhile, the deficit targets for 2025–2028 have been lowered, indicating that Italy might exit the EU's "excessive deficit procedure" earlier by mid-2026.
However, debt remains a structural vulnerability: public debt is expected to rise until 2027. Bank of America states the "snowball effect" has turned unfavorable, necessitating higher primary surpluses to offset it; interest expenses as a percentage of GDP are expected to rise from 3.9% in 2025 to 4.2% in 2028.
5) Political Agenda: Limited Short-term Disruptions But Critical Points Can't Be Ignored
The fifth issue arises from the political domain. The report believes recent risks are low. Key events for 2026 include local elections and a constitutional referendum in March about the "separation of judicial careers."
The institution assesses these events as unlikely to significantly undermine the stability of the current government; the next general election is expected in the second quarter of 2027.
6) Growth Potential: 0.7% Remains Low, Bottlenecks Point to Productivity
The final and most strategically significant question is the long-term growth potential. The report forecasts Italy's GDP growth rate to rise from 0.5% in 2025 to 0.7% in 2026, yet it remains below the Eurozone average.
Bank of America emphasizes that weak productivity continues to be Italy's core bottleneck; it is still "too early" to assert whether reforms related to the recovery plan can significantly elevate potential growth, describing it as a test Italy "cannot afford to fail."
