Bank of Italy: The economy is holding up, but global uncertainty and tariffs are clouding the outlook. What are inflation and GDP doing?

Il The engine of the Italian economy continues to turn, but with less momentum. In his Economic Bulletin No. 3/2025, Bank of Italy It paints a mixed picture: on the one hand, consumption and employment are supporting growth, on the other, geopolitical uncertainties, tariffs, and the global slowdown are threatening the hard-won stability.

“Growth continues, but the situation is subject to significant uncertainty, particularly due to evolving geopolitical and trade tensions,” warns Via Nazionale.

Italy: GDP rises, but momentum weakens

In the first quarter of 2025, the Italian gross domestic product grew by 0,3%A small but significant expansion, driven by domestic demand and, in part, from foreign orders in advance of new US tariffs. Contributing to this, explains the Bank of Italy, was “the increase in consumption and investment,” in a still favorable labor market context.

In the second quarter, however, the momentum weakened. “The subdued growth in household consumption and investment spending, impacted by low confidence and high uncertainty, was accompanied by a weakening in foreign demand,” the Bulletin states.economic activity continued to grow, but at a more moderate pace.

La manufacturing, after a long decline that began in 2022, has showed positive signsIn the first quarter, industrial production increased significantly but “overall in the second quarter, industrial activity grew slightly, but slowed down compared to the previous three months”, underlines Bankitalia.geopolitical uncertainty remains the main risk factor for the sector.

La forecast for the whole of 2025 is confirmed: growth at 0,6%, with an acceleration expected to around 0,8% on average in the following two years.

Inflation under control, but not disappeared

On the price front, spring saw relative stability.Inflation remained around 2%, as well as its underlying component, which reflected a very weak dynamic for the prices of non-energy goods and a more sustained one for services”. For the whole of 2025 and 2026, Bankitalia forecasts average inflation of 1,5%, rising to 2% in 2027.Household and business expectations remain moderate for now.

Despite the caution on the macroeconomic outlook, a positive signal comes from the public accountsThe European Commission has promoted the path to reduce the Italian deficit, positively evaluating the trajectory outlined in the Economic and Financial Document.

Eurozone: Temporary surge, then slows

The The Eurozone had a first quarter that was above expectationsGDP grew by 0,6%, benefiting from a surge in exports to the United States, ahead of the tariff hike announced by Washington on April 2. This surge, however, is destined to quickly die down.

“In the spring months, activity in the area weakened,” the Bank of Italy notes, “also due to domestic demand dynamics still held back by high levels of uncertainty.” The situation was further aggravated by industrial difficulties, weakening orders, and cautious investment. The ECB responded by further cutting interest rates, bringing the deposit rate to 2%.

The world is slowing down: tariffs, a weak dollar, and China at a standstill

Il the international picture remains complex. In the United States, the first quarter marked the first GDP contraction in three years, caused by a surge in pre-tariff imports that temporarily boosted trade. “The acceleration in international trade is destined to be temporary,” warns the Bank of Italy.

Meanwhile, the The dollar weakened, while the euro strengthened.. “This could signal a reduced appetite among investors for holding some dollar-denominated assets and greater diversification,” the Bank explains.

In China, the situation is no betterActivity is penalized by weak domestic demand and the housing crisis. The OECD has already revised Global GDP growth forecasts are down.

China’s move toward Europe: The risk of deflation in the Eurozone

In the context of tensions with Washington, Beijing could now set its sights firmly on European markets. “In the face of the increase in duties imposed by the United States, the China may adopt more aggressive pricing policies to reorient their own exports to European markets“, observes Bankitalia.

The share of Chinese goods on Eurozone imports are already high, about a fifth of the non-EU total, equal to 400 billion euros, and the downward trend in prices, also linked to the depreciation of the renminbi, is already underway. The Bank’s estimates indicate that this phenomenon could reduce eurozone consumer price inflation by around 0,1-0,2 percentage points within two years.

Good news for consumers, perhaps, but a threat to European businesses, especially in sectors with a higher technological and manufacturing content, already under pressure from weak demand and global competition.