THE WAR IN THE MIDDLE EAST WEIGHS ON THE GLOBAL ECONOMY
ITALY’S GDP GROWS MODERATELY IN THE FIRST QUARTER OF 2026
- The conflict leads to shortages of energy resources, driving up prices
- Italian household confidence declines in March, weighed down by inflation fears
- First quarter of 2026 heading for growth (0.1–0.2 pp), with the war still having little impact
- UPB 2026-27 simulations on the impact of the war: GDP down by 0.2 to 0.4 per cent for each year and rising inflation
15 April 2026 | The Parliamentary Budget Office (UPB) has published its April 2026 Economic Outlook. The report examines recent developments in both the Italian and global business cycle using the latest available indicators and provides short-term forecasts. The international economic outlook has worsened because of the conflict in the Middle East, which is exerting significant pressure on energy prices and global trade. Against this backdrop, the UPB estimates that Italy’s GDP grew by between 0.1 and 0.2 percent in the first quarter of 2026, although this estimate is subject to considerable uncertainty. The report also outlines indicative scenarios assessing the potential impact of the conflict on Italy’s economic growth and inflation over the 2026–2027 period.
The global outlook has deteriorated due to the war in the Middle East
Before the conflict, the global economy was showing signs of moderate growth, though in a fragmented context. With the outbreak of war, the destruction and damage of key energy infrastructure, and the restrictions on strategic transit routes for supplies, have triggered sharp rises in commodity prices and disruptions of global supply chains. These tensions are reflected in a rise in imported inflation, particularly in Europe, and in a strengthening of inflation expectations. This context could influence upcoming monetary policy decisions. Uncertainties also remain regarding US tariffs, with possible effects on international trade in the coming months.
In its latest forecasts, the International Monetary Fund has revised downwards its growth estimates for 2026, particularly for emerging economies and the euro area; the risks to the forecasts, mainly caused by geopolitical tensions, are assessed as tilted to the downside.
Economic performance and the short-term outlook for Italy
In 2025, Italian GDP grew by 0.5 per cent, as forecasted last year by the UPB; this rate of change, whilst showing a slight strengthening in the final stretch of the year, was overall weaker than the euro area average. The main driver of growth was domestic demand, whilst the contribution from foreign trade was negative for the first time since 2023. The labour market continued to expand, but with signs of a slowdown in the second half of the year. Wages recovered only partially relative to price levels, remaining significantly below 2020 levels in real terms (adjusted for price increases).
Inflation in 2025 remained lower than that of the euro area, but household spending was characterised by caution. In the first quarter of 2026, inflation continued to rise, reaching 1.7 per cent in March (1.5 per cent year-on-year), whilst remaining within a moderate range. Expectations, however, have shown signs of a pick-up in recent months, due to the war in the Middle East. In March, consumer confidence deteriorated, whilst business confidence held up, particularly in services and construction. Nevertheless, the UPB indicator on credit conditions confirms recent signs of improvement.
According to UPB estimates, based on various leading indicators, GDP is expected to have slowed in the first quarter of 2026 compared with the final quarter of 2025, with growth settling between one and two-tenths of a percentage point, though margins of uncertainty remain high due to the unstable global environment. In particular, there is weakness in manufacturing, a moderate growth in services and a slowdown in construction. The effects of the conflict in the Middle East are expected to become apparent in the economic activity data for subsequent quarters.
UPB scenarios on the conflict in the Middle East and the effects on the Italian economy
The Report presents some simulations representing the effects of the conflict in the Middle East on the Italian economy in the two-year period 2026–2027.
In a relatively favourable scenario, which assumes the consolidation of the ceasefire and a gradual reopening of the Strait of Hormuz, there would be a gradual normalisation of energy commodity supplies and prices, returning by the end of 2027 to the average levels seen at the end of 2025. In this context, Italian GDP growth would be 0.2 percentage points lower than in the pre-conflict forecast scenario in both 2026 and 2027, whilst inflation would rise significantly this year, by 1.3 percentage points, but more modestly (0.5 percentage points) in 2027.
In a less favourable scenario, characterised by more persistent tensions over time but without military escalation, the macroeconomic effects would be more severe. The reduction in GDP growth would be just under half a percentage point in each year of the 2026-2027 period, whilst inflationary pressures would remain sustained for longer, with an increase similar to that in the first scenario for 2026 and of 1.1 percentage points in 2027.
These simulations, which are subject to a high degree of uncertainty and are purely indicative of certain scenarios, will be updated as the international situation evolves and the conflict develops.
