28 April 2026 | The international macroeconomic outlook has deteriorated in recent months, mainly because of the conflict in the Middle East; geopolitical tensions are also having an impact on trade. The war in the Middle East has resulted in damages to energy infrastructure and led to severe restrictions on transit along strategic routes, particularly through the Strait of Hormuz; this has led to sharp rises in commodity prices and disruptions to supply chains. Pressures on imported inflation are expected, which may influence monetary policy decisions. At the same time, recent developments in the US legislative framework regarding tariffs have not reduced uncertainty (Figure 1) surrounding protectionist policies. Geopolitical tensions are driving a reconfiguration of trade relations, which is restricting trade flows to the bloc of ‘friendly’ countries.
The latest IMF forecasts point to a slowdown in global growth with risks that remain tilted to the downside. Global GDP is forecast to grow by 3.1 per cent in 2026, 0.2 percentage points less than expected in January; following strong expansion in 2025, world trade is expected to slow significantly in 2026, though the forecast has nevertheless been revised upwards compared with January’s projections. The disinflationary process is coming to a halt this year, driven by rising energy prices. In addition to the risk of an escalation of conflicts, the IMF also highlights risks related to restrictive trade policies, the potential overestimation of returns from artificial intelligence, interest rate hikes in the event of excessive debt, and the possible loss of credibility of central banks.
Geopolitical tensions have led to a rise in inflation and inflation expectations, especially in the euro area. Supply-side shocks, linked to rising energy prices and supply chain disruptions, are feeding through to consumer prices, putting upward pressure on inflation, which reached 2.6 per cent in the euro area in March (up from 1.9 per cent in February). Inflation expectations have risen in Europe, unlike in the United States, reflecting greater exposure to the effects of the conflict in the Middle East.
The exogenous assumptions in the Public Finance Document (PFD) incorporate a deterioration in the external environment but remain subject to significant risks. The document assumes a slowdown in world trade in 2026 and a subsequent gradual recovery. Oil and gas prices are revised sharply upwards for the current year, with a gradual return to previous levels in subsequent years. Interest rates are slightly higher than those assumed in October in the Public Finance Planning Document (PFPD). For the current year, the exogenous variables in the 2026 DFP appear appropriate; future developments, particularly regarding energy commodity prices, could be at risk. Although the other variables appear in line with market forward prices, a further deterioration in the global environment cannot be ruled out; this risk increases as time passes without a solid agreement being reached between the parties involved to end hostilities.
In 2025, the Italian economy continued to grow at a slower pace than the euro area. GDP rose by 0.5 per cent, widening the negative gap with the euro area’s growth rate (1.4 per cent). Last year, economic activity in Italy was mainly driven by domestic demand, whilst net external demand has given a negative contribution for the first time since 2022. On the supply side, growth in construction and services was offset by a decline in manufacturing and agriculture.
According to (UPB) estimates, in the first quarter of this year GDP is expected to have grown by between 0.1 and 0.2 percentage points on average across forecast models, though with relatively high margins of uncertainty. Manufacturing is struggling to recover, services are showing moderate growth and construction appears to be slowing down. Overall, therefore, a positive but modest change in GDP is expected.
Inflation has started to rise again, although it remains lower than in the euro area. In 2025, the NIC index rose to 1.5 per cent and reached 1.7 per cent in March 2026, reflecting the smaller fall in energy prices and the acceleration in food prices. Core inflation, on the other hand, has eased, partly due to the slowdown in service prices. Price expectations, particularly among households, have nevertheless risen sharply following the outbreak of the conflict in the Middle East (Figure 2).
The labour market continued to expand, but with signs of weakening labour force participation. In 2025, the employment rose and the unemployment rate fell to 6.1 per cent (5.6 per cent in the fourth quarter). Employment growth was driven mainly by the self-employed and those aged over 50, whilst the labour force shrank and labour force participation, although at historically high levels, remains lower than the European average. Productivity continued to give a negative contribution to growth.
The DFP’s trend macroeconomic scenario projects moderate growth throughout the forecast horizon. GDP is expected to rise by 0.6 per cent in 2026 and 2027, before strengthening to 0.8 per cent in the following two years. Compared with last autumn’s PFPD, forecasts have been revised downwards for all years, mainly due to the deterioration in the international environment and the rise in energy prices.
Economic activity in the DFP’s macroeconomic scenario is driven almost entirely by domestic demand components. Household consumption is expected to slow until 2027, affected by the loss of purchasing power linked to rising prices, but should subsequently strengthen as inflationary pressures ease. Investment is expected to remain positive in 2026 thanks to the National Recovery and Resilience Plan (NRRP), but would moderate in subsequent years. The contribution of net external demand would be limited, against a backdrop of weak international trade.
The UPB’s forecasts depict a slightly more cautious picture than that of the Government. The UPB, based on the same exogenous variables as the DFP, expects a GDP growth of 0.5 per cent in 2026 and 0.6 per cent in subsequent years. Economic activity would be supported by employment and, in the short term, by investments linked to the NRRP, whilst rising prices would dampen consumption growth.
The conflict in the Middle East is having an impact on the Italian economy, affecting macroeconomic developments next year as well. Using the econometric model employed by the UPB (Memo-It), two scenarios have been proposed to identify the order of magnitude of the effects on economic activity and prices, compared with expectations prior to the outbreak of the war. In a more favourable scenario, involving a truce leading to a permanent cessation of military hostilities, growth would be lower by a couple of tenths of a percentage point this year, with similar repercussions also in 2027; inflation, on the other hand, would rise, particularly in 2026 (Figure 3). In a less favourable scenario, involving more persistent tensions over time but without military escalation, GDP could fall by twice as much as in the best-case scenario, in both 2026 and 2027, whilst inflation would rise by a significant margin in 2027 as well.
In these scenarios, the inflationary shock is concentrated on energy and food products. The actual loss of purchasing power will be greater for households with lower spending power, given the higher proportion of these goods in their consumption baskets.
In the baseline forecast scenario, aggregate inflation rises to 3.1 per cent in 2026. Households in the lowest expenditure quintile would experience specific inflation of around 0.4 percentage points higher than the average, reaching an estimated rate of 3.5 per cent. In the most critical scenario, in which aggregate inflation would reach 3.5 per cent in the same year, the gap would rise to around 0.5 percentage points, meaning that households in the lowest expenditure quintile would experience specific inflation of 4.0 per cent. At the other extreme, households in the highest expenditure quintile would fall below the average in both scenarios – with a specific inflation rate of 2.9 per cent and 3.1 per cent respectively.
The UPB’s endorsement exercise of the PFD 2026’s macroeconomic scenario, carried out between March and early April, concluded on 8 April when the UPB sent the letter communicating the outcome. The procedures followed those adopted for previous planning documents, governed by the Memorandum of Understanding between the UPB and the Ministry of Economy and Finance (MEF). The scenario was revised by the MEF after the UPB had communicated its observations on a provisional version of the MEF’s assumptions and forecasts, following which more up-to-date exogenous variables and new forecasts were prepared.
The UPB endorsed the PFD’s trend macroeconomic scenario, whilst highlighting significant risks. The overall assessment of the acceptability of the Government’s trend macroeconomic forecasts takes into account: a) annual GDP growth projections that do not exceed the upper and lower bounds of the UPB panel’s forecast range, except in the final year of the forecast and, in any case, only marginally (Figure 4); b) annual forecasts in the QMT for nominal GDP – a variable of great relevance to public finances – which are, on the whole, more cautious than those of the UPB and the panel median; c) cumulative increases in both real and nominal GDP that are broadly consistent with the panel’s assessments, as they are close to the median values.
The MEF’s QMT was endorsed on the basis of information available at the beginning of April, following a schedule agreed with the MEF in February. Recent weeks have been marked by a truce in the war in the Middle East, which has not yet, however, led to the reopening of the Strait of Hormuz or a fall in energy commodity prices. The international outlook therefore remains exposed to very significant risks and the forecasts could be revised, even substantially, within a short period of time.
The risks to the forecasts are predominantly on the downside. The main sources of risk relate to the evolution of the conflict in the Middle East, the persistence of tensions in energy markets, the fragmentation of international trade, a possible correction in financial markets, and uncertainty regarding the response of economic policies. Added to these are climate and environmental risks, which are becoming increasingly acute due to the progression of global warming.
2025 outturn and public finance outlook. – In 2025, the deficit stood at 3.1 per cent of GDP, down from 3.4 per cent of the previous year but slightly above expectations. The consolidation of the primary balance as a percentage of GDP (from 0.5 per cent in 2024 to 0.8 per cent in 2025) was driven by higher revenue — particularly from social security contributions — only partially offset by the rise in primary expenditure, fuelled by capital expenditure. Interest expenditure remained stable. The deficit was 0.1 percentage points of GDP higher than forecast, due to higher-than-expected capital expenditure, mainly attributable to tax credits related to building incentives and the acceleration of NRRP investments.
Trend deficits projected in the PFD are affected by the deterioration in the macroeconomic outlook, resulting in higher deficits than the Medium-term Fiscal-Structural Plan (MTP) targets and equal to 2.9 per cent of GDP in 2026 (2.8 in the MTP), 2.8 per cent in 2027 (2.6 in the MTP), 2.5 per cent in 2028 (2.3 per cent in the MTP) and 2.1 per cent in 2029 (1.8 per cent in the MTP). The deficit would nevertheless return below 3 per cent of GDP in 2026, creating the conditions for exiting the excessive deficit procedure in 2027.
The net expenditure path raises concerns, particularly in 2027, when it would exceed the recommended ceiling (2.2 per cent versus 1.9 per cent). The deviation in 2027 is attributed in particular to the indexation of social benefits to higher inflation. The PFD postpones until next October an updated assessment and, if necessary, the specification of corrective measures. For 2028–29, according to the PFD, expenditure growth would return within the projected limits of 1.7 per cent and 1.5 per cent, respectively.
The primary balance gradually improves, rising from 1.2 per cent of GDP in 2026 to 1.5 per cent in 2027, 1.8 per cent in 2028 and 2.4 per cent in 2029. Primary expenditure as a percentage of GDP falls from 47.3 per cent in 2025 to 45.4 per cent in 2029 (-1.9 percentage points), mainly due to the decline in capital transfers following the 2025 peak linked to the Superbonus, and the gradual phasing out of the NRRP. After rising in 2026, revenues fall slightly in 2027 and more markedly from 2028 onwards, due to the phasing out of NRRP grants and the reduction in indirect tax revenues associated with the easing of inflation.
Interest expenditure is projected to increase over the entire forecast horizon, from 4.1 per cent in 2026 to 4.5 per cent in 2029, due to rising interest rates, high financing requirements (particularly in 2026–27), still influenced by the effects of tax credits related to building incentives, and the impact of inflation on inflation-linked securities.
Debt trends. – In 2025, the debt-to-GDP ratio rose to 137.1 per cent (up 2.4 percentage points compared with 2024), mainly due to the stock-flow adjustment, which is also linked to the cash effects of tax credits related to building incentives and the increase in the Treasury’s cash holdings. The ratio was 0.9 percentage points higher than forecast in last September’s PFPD.
In 2025, the weighted average cost of new issues fell, whilst interest expenditure remained stable and the average remaining maturity of debt stayed at high levels (7.9 years at the end of 2025). The downward trend in yields in 2025 appeared to continue into early 2026, but, from March onwards, there was an increase in yields and the spread, linked to the resurgence of geopolitical tensions, the effects of which are not yet fully incorporated into the average cost of debt. In the composition of public debt holdings, the rebalancing process continues, with the reduction in the share of public debt held by the Bank of Italy offset by an increase in that held by foreign investors and, to a lesser extent, by other residents.
The PFD’s scenario under current legislation projects an increase in the debt-to-GDP ratio to 138.6 per cent in 2026, followed by a slight reduction to 138.5 per cent in 2027 and a steeper decline to 137.9 per cent in 2028 and 136.3 per cent in 2029. Compared with the DPFP estimates, the path is less favourable throughout the forecast horizon, whilst maintaining a similar profile. The projected decline would be driven by primary surplus, but contingent upon the achievement of privatisation targets and the reduction of the Treasury’s cash holdings.
Taking into account the PFD’s trend outlook and the continued reduction in the portfolio of securities held by the Eurosystem for monetary policy purposes, estimates are provided for the net flows of government bonds that the private sector will need to absorb in 2026. Gross government bond issuance to be placed on the market is estimated at €528 billion, a higher level than in 2025, partly due to higher borrowing requirements compared with the previous year. Net government bond issuance, net of Eurosystem programmes on the secondary market, is estimated at €174 billion in 2026, a reduction of €23 billion compared with 2025 – following years of increases since 2022 – due to the use of the Treasury’s cash account to finance borrowing requirements and the decrease in maturing government bonds held in the Eurosystem’s portfolio that are not reinvested (from €77 to €72 billion in 2026).
Debt sensitivity and medium-term scenarios. – The UPB has conducted a sensitivity analysis of the DFP’s debt-to-GDP ratio forecasts. Using the macroeconomic forecasts formulated by the UPB during the validation of the DFP’s trend macroeconomic scenario, the debt-to-GDP profile is, overall, in line with that of the DFP.
In the less favourable scenario regarding the impact of the war presented above, the debt-to-GDP ratio would rise to around 140 per cent in 2026, affected by lower real growth and a reduction in the primary surplus. In the following years, higher nominal GDP growth and the gradual absorption of the shock would favour a more marked decline in the ratio, which at the end of the period would stand at levels close to the DFP forecast. The trajectory of the debt-to-GDP ratio could, however, deteriorate in the event of interest rate increases attributable to market or monetary authority reactions or following deficit-financed measures. A further sensitivity analysis concerns the lack of implementation of the programme of public asset disposals envisaged in the DFP, amounting to a total of 0.8 per cent of GDP over the three-year period 2026–2028. In the absence of such proceeds, the debt-to-GDP ratio in the UPB scenario would follow a higher trajectory and its reduction would be delayed: in 2027 it would rise to 139.2 per cent, rather than stabilising, and in 2029 it would stand at 137.2 per cent, 0.8 percentage points above the DFP forecast.
The medium-term projections for the debt-to-GDP ratio were carried out by extending the UPB scenario’s trajectory to 2041 and comparing it with that contained in the MTP. Using a set of assumptions regarding the macroeconomic and public finance outlook, the medium-term projections show that the debt-to-GDP ratio in the UPB scenario would remain above the MTP trajectory. After peaking at 138.6 per cent in 2026, debt would begin to decline, but at a slower pace than projected in the Plan. At the end of the seven-year consolidation period, in 2031, the ratio would stand at 135.4 per cent, approximately 3 percentage points above the MTP. The reduction would continue into the following decade. In 2041, the debt in the UPB scenario would stand at around 123.8 per cent of GDP, compared with the 113.7 per cent projected in the MTP. The gap between the two trajectories mainly reflects less expansionary macroeconomic assumptions and a more subdued primary balance profile in the UPB scenario.
The public finance framework in light of the fiscal rules. – The new Code of Conduct, adopted in December 2025, clarifies that during the EDP, whether a Member State has taken ‘effective action’ in response to the Council’s recommendations is assessed on the basis of adherence to the corrective path for net expenditure, as recorded in the control account. A deviation of more than 0.3 percentage points of GDP in annual terms or 0.6 percentage points in cumulative terms constitutes a strong presumption of no effective action. However, even in this case, the conclusion is not automatic, as the Commission must conduct a comprehensive analysis taking into account possible mitigating and aggravating factors.
In the 2026 Spring Package, the Commission will provide an updated assessment of the 2025 public finance results and the corresponding 2026 estimates in the light of the fiscal rules. The updated assessment will be based on outturn data, the Annual Progress Reports that Member States are required to submit by 30 April, and the Commission’s spring forecasts. On that occasion, the Commission will carry out the first monitoring of the control account for each Member State based on outturn data on net expenditure developments in 2024–25.
The PFD updates the net expenditure growth rate for 2025, which rises by 1.9 per cent, exceeding the 1.3 per cent limit recommended by the Council, with a deviation of 0.3 percentage points of GDP on an annual basis. The upward revision compared to the Technical Explanatory Note (TEN) is mainly attributable to higher primary expenditure linked to the larger-than-expected recording of Superbonus-related construction tax credits in the public accounts. In 2026, the projected growth is in line with the recommended limit. In 2027, the indicator is projected to exceed the recommended rate by 0.3 percentage points. According to the PFD, in 2028 and 2029 the projected growth in net expenditure returns within the respective limits. Despite the slippage in 2027, the cumulative deviation is expected to remain below the threshold of 0.6 percentage points of GDP. The DFP does not provide sufficient information to verify the estimates beyond 2026 nor forecasts on nationally financed public investment after that year – a requirement for the extension of the adjustment period to seven years.
Some general observations on the public finance framework of the DFP. – The extension of the document’s forecast horizon is positive; planning and transparency would be strengthened by indications, even if only of a general nature, on future policy measures and their financing, as was the case in the EFD. The document notes that the net expenditure limits will be exceeded in 2027, postponing possible corrective measures until the autumn; the definition of corrective measures would have benefited from a more extended period of analysis and discussion, rather than being concentrated in the period immediately preceding the budget law. It is also desirable that the information content of the document will be further strengthened, with complete data on net expenditure for all years and nominal values alongside those as a percentage of GDP.
The public finance outlook is characterised by high uncertainty and downside macroeconomic risks, especially in the current context. It is necessary to build up budgetary buffers to cope with significant shocks, particularly energy-related ones, and with the emergence of new budgetary priorities (defence, climate, energy and demographic transitions, digital/AI). The path of debt-to-GDP reduction could prove less favourable in the event of lower growth or if the assumptions regarding stock-flow adjustments are not met.
Despite the deterioration in the macroeconomic outlook and the rise in interest expenditure, the trend outlook for public finances continues to show significant signs of fiscal consolidation. The gradual improvement in the primary balance as a percentage of GDP and the reduction in the debt-to-GDP ratio are confirmed, with the latter initially modest in 2027 and more pronounced from 2028 onwards.
Failure to exit the excessive deficit procedure does not preclude the possibility of invoking the safeguard clause for increased defence expenditure. For countries already subject to the excessive deficit procedure, such as Italy, the clause allows for an increase in defence expenditure compared with 2024 without triggering the subsequent steps of the procedure, provided that deviations in net expenditure are due to the increase in such expenditure.
In terms of net expenditure, budgetary margins appear to have already been utilised throughout the forecast horizon: this limits the use of fiscal policy to counter the current crisis, particularly if the downside risks to growth were to materialise. The DFP indicates that it will be necessary to redefine priorities: it would have been desirable for these indications to have already been set out in the document under review in order to enhance the predictability of fiscal policy.