Italy's economic growth is projected to slow between 2025 and 2026, primarily due to anticipated US tariffs of 20% on EU goods and delays in the disbursement of EU recovery funds.

Efficient use of the EU recovery funds is critical for Italy's economic growth, yet only 63% of the allocated EUR 194.4 billion has been disbursed, with significant challenges in effective spending.

By October 2024, only EUR 58.6 billion had been spent from the recovery funds, which is about 30% of the total allocation, primarily directed towards tax credits and infrastructure projects.

To bolster its growth potential, Italy plans structural reforms in the judicial system, public administration, and competition law by 2026, which are crucial for managing the country's high public debt of 135.3% of GDP.

Scope Ratings estimates that these tariffs could reduce Italy's GDP growth by approximately 0.5 to 1 percentage points from 2025 to 2027, impacting industrial output, exports, and investment.

In 2024, Italy's goods exports to the US were valued at EUR 65 billion, making up 10.4% of total exports and 3% of GDP, with key sectors including pharmaceuticals, automotive, and luxury goods.

The expected economic stimulus from the recovery funds is projected to have a cumulative impact of 2.7 percentage points on GDP growth from 2025 to 2026, but achieving this may require expenditures that are not feasible.

Italy's economy grew by 0.7% in both 2023 and 2024, which is below its medium-term potential of 1% and the euro-area average growth of 0.9%.

Currently, Italy's economic output is about 5% above pre-pandemic levels, outperforming France and Germany but lagging behind Spain and Portugal.

Italy is particularly vulnerable to these trade tensions, as the US has become a significant export market, with a bilateral goods trade surplus of around EUR 39 billion.

The anticipated trade war is expected to negatively impact Italy's industrial output, exports, and investment due to increased economic uncertainty.

The full economic implications of US tariffs on Italy remain uncertain, as different sectors will experience varying levels of impact, with pharmaceuticals likely to be less affected than automobiles and food products.