Italy: where prudence meets potential

  • Due to its high dependence on energy imports, Italy was among the European countries most affected by the conflict in Ukraine. The government’s 2023 budget measures aim to limit the effect on Italian households and firms, providing a floor to the impact of the inflation squeeze and have resulted in a better-than-feared economic outcome.
  • The introduction of the new Transmission Protection Instrument, the changing structure of sovereign debtholders, and the high average maturity of Italian debt suggest there is no immediate cause for concern despite the country’s growing debt mound.
  • As the largest beneficiary from the Next Generation EU (NGEU) post-pandemic reconstruction plan, Italy has a unique opportunity to modernise its economy and propel growth via structural reforms. As the third biggest economy in the EU, Italy can rely on its advanced industrial sector and healthy household balance sheets to stimulate investments.
  • The Italian market presents several opportunities for investors. Government and corporate bonds represent a good source of carry in fixed-income portfolios. Equity[1] markets are still dominated by small- and medium-cap firms, with a few relevant exceptions in the energy, industrial and banking sectors. Equities can be attractive for their high dividend yields.
  • In terms of ESG[3], Italian firms are catching up, but the road ahead is still long. NGEU investments may create new opportunities for the development of ‘improvers’ – companies showing a consistent improvement in their governance, environmental and social practices.


Italy’s large dependence on Russian gas and other commodity imports left it vulnerable to the war in Ukraine. At the start of the conflict, over 40% of the country’s gas supplies came from Russia, meaning its energy sector was heavily exposed to shortages prompted by the barrage of sanctions imposed to thwart the invasion. The largely energy-driven, global inflationary spike in 2022 further complicated Italy’s economic outlook, and price rises were not matched by a similar growth in wages. Nevertheless, Italy’s economic performance surprised to the upside last year and GDP growth outperformed many of its Eurozone peers, mainly thanks to the resilience of its domestic demand, household consumption and investments, as well as external demand and exports.


Fiscal support and the return of tourism after Covid underpinned the recovery, especially in the services sector. However, in the last quarter of 2022 the Italian economy contracted slightly, with Italian GDP falling by 0.1%. Some weakness may persist throughout the first quarters of 2023, but there should be a return to modest growth thereafter. Lower energy prices will help lift sentiment and ease pressure on households and companies, providing some support for better growth by removing the risk and uncertainty of gas rationing. These positive factors could in part offset the dragging impact of tighter monetary policy and decreasing fiscal support, the effects of which we expect to start showing in the second half of the year.

Additionally, following elections in late September, the new government’s budget was passed on 29 December 2022 and was largely aligned with expectations, albeit with some minor amendments. The bulk of expansionary measures, in the region of €21bn or 1% of national GDP, are geared towards helping households and firms deal with the energy crisis. About half of this stimulus is in the form of tax credits for firms’ energy bills, while the rest includes measures to reduce VAT for energy transactions, as well as a ‘social bonus’ and other such one-offs. The government’s need to extend these measures, which only cover the first quarter of 2023, will be contingent on the evolution of energy prices and its ability to forge new alliances and diversify its energy supply in order to keep costs subdued.

The decline in global energy prices has been imperative on this front. The domestic market price of gas (on the Virtual Trading Point – PSV) has dropped substantially over the past few months. In January, the average price was around €68/MWh: a marked drop from the peaks reached last August (up to €310/MWh). Lower energy costs should help ease inflation, provide some relief to economic activity and assist the government in limiting the pressure on its deficit. Current levels already carry important fiscal savings: in Q1 alone, the government could save around €8bn on fiscal measures, relative to official estimates that were based on the gas price of €120/MWh. Overall, the Italian economy is expected to show resilience despite these extraordinary economic conditions, and to recover in line with the other main European countries starting from Q2 2023.

Additionally, while the country has historically wrestled with a vast debt legacy, several mechanisms are in place to preserve growth and ensure there is no immediate cause for concern regarding its debt burden:


  • The Next Generation EU (NGEU) fund will help preserve growth in the coming years, and, to a lesser extent, will reduce the need for market funding and increase average debt duration;
  • The sharp rise in CB debt holdings, coupled with relatively steady domestic demand for sovereign debt, has softened the link between foreign flows and spread[2] volatility. The introduction of the Transmission Protection Instrument (TPI) also provided an important backstop, contributing to a lower correlation between ECB rate expectations and peripheral spreads;
  • The high average maturity of sovereign debt (standing at 7.04 years in December 2022, close to the 2010 historical peak) has contributed towards limiting the negative impact of the current interest rate cycle on the cost of the overall debt burden, which is still quite low by historical standards.

In fact, although higher rates have made borrowing more expensive for governments, sovereign debt remains on a sound path in the near term. Inflation has pushed nominal growth higher, while debt servicing costs will take some time to catch up, meaning that countries with a higher average maturity of outstanding debt (such as Italy) have locked in lower rates for longer. This will be particularly helpful for supporting expansionary fiscal measures in light of the current and complex macroeconomic environment.

Termes et définitions
1. Equity ( Equity ) Equity est un terme qui désigne une forme d’investissement à long terme dans une entreprise. Lorsqu’un investisseur achète…
2. spread. Le terme “spread” peut avoir plusieurs significations dans le domaine financier, en fonction du contexte. Voici les principaux…
3. ESG ( ESG ) L’ESG (Environnement, Social et Gouvernance) est un terme générique qui désigne les critères de responsabilité sociale et environnementale…
Économie, marchés : la revanche de l’Europe ?
Une journée sur les marchés : le 15.02.23
Plus de publications


Abonnez-vous et recevez toutes les semaines notre newsletter économique et financière.