DBRS on Italy's Economic Revival

Ramp-up of RRF Funds Execution Key to Keeping Investment Flowing

A recent Morningstar DBRS commentary stated that Italy has experienced a robust revival in investment activity since the pandemic, significantly outpacing other major European economies. This resurgence, driven by tax incentives, the National Industry 4.0 Plan, and Recovery and Resilience Facility (RRF) funds, has lifted Italy's potential GDP growth after a decade of stagnation. However, challenges such as low R&D investment, weak labor productivity, and adverse demographics persist.

Rekindled Investments Drive Growth Potential

Italy has experienced a remarkable resurgence in investment activity since the pandemic, outpacing other major European economies. Between late 2019 and mid-2024, real investments in Italy soared by 34.3%, significantly higher than Germany, France, and Spain. This surge has been instrumental in reversing a declining trend in Italy's net capital stock, marking a pivotal improvement after years of stagnation.

Key drivers of this rebound include:

• Generous tax credits: Policies like the "Superbonus 110%" for home renovations spurred activity in the construction sector.

• Support for machinery and equipment (M&E): Tax incentives and the "National Industry 4.0 Plan" boosted investments in capital goods, particularly in the manufacturing sector.

• NextGenerationEU (NGEU) funds: A critical source of funding that has enhanced infrastructure and broader economic resilience.

As a result, Italy's potential GDP growth is now projected at 0.9% for the period from 2024 to 2029, a significant improvement from the near-zero growth of the previous decade. However, challenges such as adverse demographics, limited female workforce participation, and weak labor productivity persist.

Tax Incentives and European Funds: A Foundation for Revival

The eurozone debt crisis left a deep imprint on Italy's investment landscape. Gross Fixed Capital Formation (GFCF) as a percentage of GDP plummeted from 22% in 2007 to a low of 16.8% in 2014. By 2019, the gap between Italy's investment ratio and the eurozone average reached 3.8%. However, the tide turned post-2020, driven by:

1. Residential Construction: Fueled by tax credits, construction activity surged, with residential investments climbing to 6.4% of GDP from a prior average of 4%.

2. Machinery and Equipment: Aided by long-term industrial policies, investments in M&E grew significantly, surpassing eurozone averages in 2023.

3. Recovery and Resilience Facility (RRF) Funds: These funds helped reduce Italy's investment gap with the eurozone, turning it positive by 2023.

While these trends have buoyed economic recovery, low investment in research and development (R&D)—at just 1.4% of GDP compared to the eurozone's 2.3%—remains a weak spot

Execution of RRF Investments: The Next Crucial Step

As tax credits like the "Superbonus 110%" phase out, Italy’s economic momentum hinges on the successful implementation of its National Recovery and Resilience Plan (NRRP). With substantial RRF funds still unspent, a ramp-up in infrastructure projects is expected to counterbalance the decline in residential investments. Key expectations include:

• A rise in non-residential investments through infrastructure development in 2025–2026.

• Overcoming legislative and bureaucratic hurdles to unlock public works projects.

Although implementation risks are high, the Italian government's commitment to reforms and a streamlined NRRP could accelerate spending and sustain economic growth.

Outlook: A Promising but Challenging Path

Italy's recovery underscores the critical role of targeted investments and European funding in revitalizing an economy. With the right mix of policy execution, RRF-driven projects, and structural reforms, Italy could sustain its growth trajectory. However, addressing systemic challenges like labor market rigidity and underinvestment in R&D is essential for long-term economic resilience.

This economic rebound offers valuable insights into how coordinated policy measures and funding can transform structural weaknesses into opportunities for growth.

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Relevant Links:

https://dbrs.morningstar.com/research/443122/italy-the-ramp-up-of-rrf-funds-execution-key-to-keeping-investment-flowing

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