Italy’s Economic Growth Driven by Construction Incentives, But Long-Term Challenges Persist

Italy has recently experienced growth, which can be attributed to a major resurgence in tourism as people began taking foreign holidays post-Covid. In comparison to Germany, Italy has a lower share of manufacturing in GDP and was not as affected by the surge in energy prices after Russia’s invasion of Ukraine. However, Italy’s recent growth has been driven mainly by a surge in construction output due to a tax incentive scheme led by Giorgia Meloni’s government. This surge is expected to continue for a while but is likely to fade by the end of the year as the tax incentive scheme is phased out. Capacity constraints may also limit construction activity at this level for much longer, leading to a projected Italian growth of around 0.5pc next year, compared to a eurozone average of 1pc.

In terms of medium-term prospects, there is more political stability in Italy than before, but the country still faces major structural problems. The working population is expected to decline significantly, and while there is some potential for an increase in female participation rates and retirement age adjustments, these factors may not fully offset the decline in the labor force in the coming years and decades. The more serious issue lies in Italy’s low productivity growth, which is a problem not only in Italy but across the world. Despite recent successes, Italy still struggles with deep-seated challenges in terms of productivity and structural issues.