GDP growth is projected to decline from 3.8% in 2022 to 1.2% in 2023 and 1% in 2024. High inflation is eroding real incomes given subdued wage growth, financial conditions are tightening, and exceptional fiscal support related to the energy crisis is gradually being withdrawn, weighing on private consumption and investment. Domestic risks are broadly balanced. Accumulated household savings remain large, which may support a more rapid rebound of domestic demand than currently expected. By contrast, delays in the implementation of the National Recovery and Resilience Plan (NRRP) could lower GDP growth.

As the effects of monetary policy tightening are starting to bite and energy-related fiscal support to households and businesses is being scaled back, the macroeconomic policy stance is becoming restrictive. The mildly restrictive fiscal stance appears broadly appropriate, and continued consolidation will be needed in the years ahead to put the debt ratio on a more sustainable path. The speedy implementation of structural reforms and public investment plans in the NRRP will be paramount to sustain activity in the short term, and to lay the ground for sustainable growth in the medium term.

Following a contraction in the fourth quarter of 2022, real GDP picked up by 0.6% in the first quarter of 2023. Recent high-frequency indicators point to modest growth in the near term. While industrial production and retail sales remain subdued, business and consumer confidence have been strengthening over the past few months. The unemployment rate is historically low, vacancies are high, and employment continues to grow robustly, despite a shrinking working-age population. The vibrant labour market and recent declines in energy prices are stabilising real household incomes, supporting a modest recovery in private consumption in the first half of 2023.

Recent declines in international energy prices have been transmitted rapidly, lowering consumer price inflation, which declined from more than 12% in November to 8.1% in May. Due to high gas storage levels at the end of the autumn of 2022 and a mild winter, gas inventories in April were about twice those a year earlier. Given significant progress with the geographical diversification of gas supply over the past year, this suggests storage levels could approach capacity before the winter of 2023-24. Spillovers from recent international banking sector turbulence to the Italian banking sector have so far been limited.

The tightening of euro area monetary policy has led to a significant increase in borrowing costs for households and businesses, with bank lending rates having increased by more than 2 percentage points over the past year. It is also raising the government’s cost of refinancing the large stock of public debt, with debt servicing costs expected to reach around 4% of GDP in 2024.

The government will phase out fiscal measures to cushion the impact of the energy price shock on households and businesses in mid-2023. Most energy crisis support measures adopted in 2022 – such as tax credits on businesses’ electricity bills, reductions of fixed charges on gas and electricity, as well as targeted income support for low-income households – were extended into the first half of 2023. But generosity was reduced and some cost-inefficient and untargeted measures, such as the reduction in excise taxes on fossil fuels, were ended. The fiscal savings from the phasing out of crisis support and other fiscal tightening measures, including tightening of the rules on the costly “Superbonus” tax credit for building renovations, amount to about 2% of GDP in 2023. This is partly offset by the expected ramp-up of spending related to Next Generation EU (NGEU) by about 1½ per cent of GDP. Overall, the combination of lower energy prices, tighter financial conditions and mildly restrictive fiscal policy should lead to a gradual easing of inflationary pressures while allowing a modest recovery in activity.

Real GDP is projected to grow modestly over 2023-24 despite recent declines in energy prices and the expected strengthening of NGEU-related spending. The erosion of real incomes due to subdued wage growth in a context of high inflation, the withdrawal of exceptional fiscal support related to the energy crisis, and the tightening of financial conditions are weighing on private consumption and investment. These headwinds are only partly offset by the decline of inflation, as the energy price shock has led to wider price pressures that will dissipate only slowly. While the decline in energy prices is expected to reduce inflation both directly by reducing energy price inflation and indirectly by reducing firms’ input costs, wage growth is expected to pick up over 2023-24. Increases in borrowing costs will curtail private investment, especially in the residential sector that will also be hit by the tightening of the “Superbonus” tax credit conditionality. Weakness in private investment will somewhat offset the positive impulse on total investment from the expected pick-up in public investment related to Next Generation EU funds. While net exports contribute positively to growth over 2023-24, the recent appreciation of the euro will limit further gains in export competitiveness.

Risks to growth are broadly balanced. Accumulated household savings remain large, which could drive a more rapid rebound of domestic demand than currently expected as households draw down excess savings. By contrast, negative spillovers from recent international banking sector turbulence or further delays in the implementation of public investment projects in the National Recovery and Resilience Plan (NRRP) could lower growth.

While fiscal policy over 2023-24 strikes an appropriate balance between fiscal prudence and supporting growth, in the years ahead more fiscal consolidation will be needed to put the debt-to-GDP ratio on a more sustainable path. Consolidation plans should include ambitious measures to tackle tax evasion and comprehensive spending reviews to increase the efficiency of public spending. The full implementation of the ambitious public investment and structural reform plans in the NRRP could durably lift Italy’s GDP, which would have the added benefit of putting further downward pressure on the debt-to-GDP ratio. Ongoing reforms of the public administration, the justice system and competition are on track and remain critical to raise GDP in the medium term. But spending of NGEU funds is well behind schedule, with cumulated spending at the end of 2022 being about 50% below initial spending plans, which mainly reflects delays in the implementation of public investment projects. The priorities should be to swiftly replace unviable projects with viable ones and to strengthen the capacity of the public administration to efficiently manage and implement the public spending projects foreseen by the NPRR. These projects crucially include infrastructure spending to facilitate the digital and green transitions, as well as the expansion of public pre-school childcare to promote female labour market participation in the context of a rapidly shrinking working-age population.


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