US Tariffs may harm Italian Growth

A Scope Ratings commentary

Italy’s economic outlook is clouded by mounting global trade tensions and delays in the country’s recovery investment program, according to credit rating agency Scope Ratings. While medium-term prospects remain stable thanks to ongoing reforms and EU support, the short-term picture has dimmed.

In a recent analysis, Scope Ratings warned that “Italy’s economy is set to grow more slowly in 2025-26 given US tariffs and delays in recovery-plan investments.” After modest GDP growth of 0.7% in both 2023 and 2024—below its estimated 1% potential and the euro area average—Italy now faces additional headwinds from a potential escalation in trade barriers.

Scope noted that Italy is particularly exposed to the risks of a protracted trade war, due to its “close trade relations with the US.” The US has become a vital market for Italian exports, which totaled €65 billion in 2024, accounting for over 10% of total exports and about 3% of GDP. Sectors like pharmaceuticals, machinery, transportation, and luxury goods are among the most reliant on US buyers.

If the US were to impose tariffs of 20% on EU goods and 125% on Chinese goods—with expected retaliatory measures—Scope estimates that “Italy’s economic growth [could be reduced] by around 0.5-1 percentage points of real GDP in the period 2025-27.” This would likely hit industrial output, investment, and export performance, worsening economic uncertainty.

At the same time, Italy’s effort to stimulate growth through EU-funded recovery initiatives is hampered by slow fund absorption. Although the country has received €122.1 billion out of its €194.4 billion allocation under the EU Recovery and Resilience Facility, actual spending has lagged. As of October 2024, only about €58.6 billion had been used—roughly 30% of the total—according to industry group Confindustria.

Scope noted that the “lower-than-expected annual spending of allocated funds has also reduced the potential stimulus for the economy.” Initially, Italy projected an additional 2.4 percentage points of GDP growth from the plan between 2021 and 2024, but this was later revised to just 1 percentage point. Now, most of the economic boost is expected in 2025 and 2026, assuming exceptionally high levels of spending—€57.1 billion in 2025 and €49.5 billion in 2026—which Scope sees as unlikely to be fully realized.

Despite these challenges, Scope emphasized that Italy’s long-term growth outlook remains supported by EU funds and planned structural reforms. “Italy’s growth potential of around 1% over the medium term should also be supported by the implementation of structural reforms planned by 2026,” the report stated. These include reforms to the judicial system, public administration, and procurement processes—seen as crucial for enhancing productivity and managing Italy’s high public debt, which stood at 135.3% of GDP at the end of 2024.

In sum, Italy is navigating a tough economic environment shaped by external trade risks and internal execution hurdles. But if it can accelerate reform implementation and improve fund absorption, it may yet unlock more stable, long-term growth.

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Relevant Links:

https://www.scoperatings.com/ratings-and-research/research/EN/178714

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