Italy's economy closed 2025 on a positive note, with full-year growth revised up to 0.7% and a statistical carry-over of 0.3 percentage points into 2026. That backdrop had raised hopes of a consolidation in activity following a cycle of declining growth, still weighed down by the lingering effects of the past energy crisis. The deterioration of the international environment since the start of the year has changed that picture.

With energy costs rising in the wake of the Strait of Hormuz blockade, Italy is once again vulnerable to its heavy dependence on gas and to upward price pressures. The prolonged pass-through of conflict-driven energy prices is expected to weigh on 2026 growth by 0.6 percentage points, bringing the annual rate down to 0.3%. Inflation is projected to peak at 3.2% in 2026, breaking with the disinflationary dynamics of recent years.

Domestic demand is likely to take the strain. Although consumption staged a modest recovery in late 2025, supported by an improvement in real disposable income, that upturn could be tempered by rising inflation, with households likely to increase precautionary behaviour. Investment, while still underpinned by significant carry-over effects, is expected to slow markedly, posting negative average growth in 2026. A gradual recovery should nonetheless materialise from Q2 2027 as the effects of the geopolitical crisis fade.

Growth is expected to consolidate modestly over 2027, but persistently elevated inflation and weak domestic demand drivers would continue to weigh, especially as the country remains disrupted by high volatility in foreign trade, where the fallout from US trade policy is still being absorbed.