Bank of Italy raises 2026 growth forecast to 1%, warns of 2027-28 contraction in adverse case

Growth forecast raised for 2026

The Bank of Italy published its October macroeconomic projections on Friday, 16 October, forecasting GDP growth of 1% for 2026. That is 0.4 percentage points above the June forecast, and 0.9% once the figures are adjusted for working days. The bank expects 0.7% growth in 2027 and 0.8% in 2028, with the 2028 figure 0.1 points below June. The upgrade for this year reflects a smaller-than-expected impact from the Middle East conflict in the first half, along with investment linked to the digital and energy transition and tourism in the summer quarter.

Government spending and the downside case

The bank links part of the 2027 upgrade to planned increases in defence and energy-security spending set out in the Documento programmatico di finanza pubblica approved by the Council of Ministers on 2 October. Those measures are expected to support activity over the next two years, while higher interest rates offset them in 2028. The 2026 figure matches the estimate in that programme, and the 2027 forecast sits between the 0.6% of the tendential framework and the 0.8% of the Mef's programmatic framework. The IMF's projections of 0.8% for 2026 and 0.6% for 2027, and the European Commission's 0.5% from May, are lower. In an adverse scenario with sharply higher commodity prices, growth could fall to zero this year, and GDP would decline 0.3% in both 2027 and 2028.

Inflation peaks in the fourth quarter

Average inflation is forecast at 3.2% in 2026, peaking in the fourth quarter, before easing to 2.4% in 2027 and 1.7% in 2028. The harmonised index reached 4.1% in September, up from 3.2% in August, while the energy component rose to 22.3%. The bank describes the surge as largely temporary.

The rise in inflation this year is largely attributable to pressures from higher energy goods prices, which would fade over the course of next year.

Underlying inflation, excluding energy and food, is expected to stay around 2% throughout the period. Pump prices have risen on average by 35 cents per litre for petrol and 55 cents for diesel since the conflict began, with refining margins at their highest in about twenty years. A voluntary, temporary cap on pump prices introduced by the main fuel distributors from late September has cut prices by about 10 cents per litre on average, and the bank estimates it will lower energy inflation by at least 3.5 points. The government's diesel excise cut ended on 5 October.

Utility bills and bond yields

Electricity and gas bills in September were 12% and 20% above February levels, although still below the peak of the 2021-22 crisis. The bank warned about the coming months.

The sharp rise in natural gas prices over the last month nonetheless foreshadows further increases in bills in the autumn.

The energy regulator Arera has already announced an increase of about 37% in electricity tariffs for vulnerable customers in the protected market for the fourth quarter. Long-term government bond yields have risen since late February to historically high levels across advanced economies. The Italian 10-year BTP reached 4.6%, the French OAT 4.9% and the German Bund 3.5%, while the US 10-year yield has exceeded 5%. The ECB raised its deposit rate by 25 basis points to 2.5% in September. Since July, yields on major euro-area sovereign bonds have risen by about 70 basis points on average, with France's rise steeper because of political uncertainty and public finance concerns. The BTP-Bund spread stands at 110 basis points.