Italian GDP unexpectedly contracts

The Italian gross domestic product (GDP) contracted by 0.1% quarter-on-quarter in the three months to June 2025, according to a preliminary estimate from Istat.

This marked a reversal from the 0.3% growth recorded in the first quarter and defied market expectations of a modest 0.1% expansion, highlighting the fragile state of Italy’s recovery. The Q2 contraction was the first in two years—since Q2 2023—and points to mounting pressures on the economy from both domestic and external sources.

The downturn was primarily driven by a negative contribution from net foreign demand. Trade flows were disrupted by renewed tariff tensions, particularly with the United States, following the announcement of a 15% levy on a wide range of European goods exports.

Italian exporters, many of whom are heavily reliant on transatlantic markets for machinery, automotive components, and agri-food products, have been particularly vulnerable to the shifting trade landscape. In addition, volatile global commodity prices, especially in energy and industrial metals, further complicated the trade environment, inflating input costs and weighing on margins for both producers and exporters.

On the domestic front, while consumption and public investment remained relatively stable, they were insufficient to offset the drag from the external sector. Business investment, especially in construction and manufacturing, showed signs of stagnation amid rising borrowing costs and persistent policy uncertainty.

Moreover, consumer sentiment weakened slightly in the quarter, reflecting broader concerns about inflation resilience and job market softness, which likely tempered household spending.

Year-on-year, however, Italy’s GDP still expanded by 0.4%, suggesting that the economy retains some underlying resilience when compared to the same period in 2024. Nonetheless, the pace of annual growth continues to lag behind the broader Eurozone average, underscoring the structural challenges Italy faces, including high public debt levels, low productivity growth, and demographic pressures.

Looking ahead, the economic outlook remains clouded by uncertainty. The potential for retaliatory trade measures, ECB monetary policy adjustments, and slow progress on structural reforms may continue to cap Italy’s growth potential. Policymakers in Rome are likely to face increasing pressure to introduce targeted fiscal support—particularly for export-oriented industries and low-income households—while ensuring alignment with EU fiscal rules.

The Q2 GDP miss is a stark reminder that while headline inflation has eased and Europe has broadly avoided a recession, the path to sustained, balanced growth remains uneven, especially for more vulnerable economies like Italy.