Italy’s economic recovery has lost momentum. Output is set to decline well into 2012, and thereafter the recovery is projected to be weak. Confronted with adverse market sentiment, the previous government adopted emergency measures to balance the budget in 2013. The newly-appointed government needs to fully implement this programme as well as undertake important structural reforms to spur growth. Fiscal tightening, combined with slowing world demand and weak competitiveness, will be a drag on growth in the short term, but it is needed to ensure progress toward fiscal sustainability. Unemployment will rise and wage growth will moderate, as will inflation after the impact of a VAT rise has worked through.