Italy’s economic revival: Can the momentum outlast the stimulus?

Investing.com — Italy’s economic performance over the past five years has quietly eclipsed that of its larger eurozone neighbors, a reversal that analysts say owes more to government spending than structural reform. According to a research note published this week by UBS, the country’s real GDP growth has outpaced the eurozone average, as well as Germany and France, since 2019.

The report points to a confluence of factors behind the outperformance. Unemployment has fallen to its lowest level in decades. Corporate leverage has declined. And crucially, Italy’s net international investment position has turned positive for the first time since the 1980s — a sign that decades of capital outflows may be reversing.

But the engine of this recovery has been investment, not exports or consumption. Fixed investment accounted for the bulk of Italy’s growth over the period, with construction activity playing an outsized role. Value added in construction rose sharply and contributed roughly one-third of the total increase in gross value added, according to the note.

Much of that construction boom was fueled by two policies: the Superbonus housing renovation program — a generous tax incentive that has since been largely phased out — and funding from the European Union’s Recovery and Resilience Facility (RRF). Italy is the largest beneficiary of the RRF, with €194 billion allocated between 2021 and 2026. About 85% of those funds have already been disbursed.

Even with the Superbonus winding down, construction activity has remained resilient, supported by continued spending of RRF funds and a backlog of previously disbursed money. One final RRF disbursement is expected by the end of 2026, and UBS notes that unspent funds could keep supporting economic activity through 2027.

Beyond the near term, the picture grows hazier. Italian GDP growth is forecast to slow to 0.5% in 2028 as the RRF-driven investment support fades. While estimates of Italy’s potential growth rate have improved from pre-pandemic levels, they still lag behind the eurozone average. The question, economists say, is whether the recent outperformance reflects a genuine structural shift or a temporary sugar high from public spending.

There are other bright spots. The report highlights greater political stability in Italy this decade — a notable contrast to the frequent government collapses that marked earlier periods. The current administration, led by Prime Minister Giorgia Meloni, could become the country’s longest-serving government of the post-war era, with parliamentary elections not required until December 2027.

That stability has also been reflected in financial markets. The note points out that Italian equities have benefited from stronger economic performance, lower sovereign bond spreads, and improved banking sector fundamentals in recent years. Investors have taken notice, pricing in a premium for Italian assets that was unthinkable a decade ago.

Still, risks remain. The end of RRF disbursements and the phasing out of the Superbonus will test whether Italy can sustain growth without artificial props. And while political stability is a plus, it has yet to translate into the kind of deep structural reforms — on productivity, bureaucracy, and demographics — that economists say are needed for long-term resilience.

For now, Italy’s run looks impressive by recent standards. But the clock is ticking on the stimulus that made it possible.