EXECUTIVE SUMMARY
- Rising political risks have exacerbated an already challenging economic outlook for Italy. Ahead of the snap elections on 25 September, a right-wing coalition comprising the Brothers of Italy, Lega and Forza Italia is currently leading the polls and is likely to secure the parliamentary majority. However, with the more moderate Democratic Party polling at 23%, and possible post-election coalitions not clear yet, a certain degree of uncertainty lies over the outcome.
- Campaign pledges center on expensive fiscal spending, which could put already stretched public finances to the test. To add to this, NGEU-related reforms will require timely implementation to secure the funds.
- Downside risks to the fiscal outlook will increase if the new government “snaps back” to pre-Draghi fiscal profligacy. More spending to shield vulnerable households and firms from the energy-price shock is necessary.
- Current debt dynamics are improving due to high inflation (above 5% also in 2023), but stabilizing debt over the medium and longer terms will require more fiscal effort given the expected slowdown of economic activity; we now expect GDP contract by 0.5% in 2023. While we do not anticipate a repeat of the 2018 fiscal struggles, much will depend on the election outcome and the draft budget for 2023.
- Capital markets have not reacted strongly (given elections were expected at some point). The widening sovereign credit spread relative to the German Bund mostly reflects the general increase in interest rates rather than Italy’s idiosyncratic risk.
