A welcome economic rebound is underway in Italy. After having recorded real GDP growth of 1.9% last year – below the average for the euro area, but above the potential rate – growth is set to maintain that pace in 2007. While this partially reflects ebullient foreign demand, there are also early signs of more fundamental improvements. Some Italian exporters have regained export market shares in the segment of high-quality consumer items and machinery to produce them, in which they have traditionally specialised. The rapid increase of export prices may signal that these firms have recouped some of their pricing power and moved upscale towards highly-priced products. However, there are also firms that failed to restructure, innovate or outsource and must still downscale, as suggested by the overall decline of profitability and continuing loss of export market shares in the aggregate. The fact that Italy’s export structure remains heavily biased towards low-skill production, hence exposing it to competition from emerging market economies, continues to handicap growth.