Investing.com -- Italy heads into 2026 with a steadier political and fiscal backdrop, but investors are still weighing six unresolved issues that will shape confidence in the euro zone's third-largest economy, according to BofA Global Research.
The most immediate question is whether household consumption can recover after a weak 2025.
Italian consumption in the third quarter of 2025 was only about 2 percentage points above pre-Covid levels, compared with 4.8 percentage points in the rest of the euro area. Over the previous four quarters, gains totaled about 90 basis points.
The brokerage notes that real income gains from disinflation were largely saved, not spent, with the saving rate rising to 14.1%, its highest level since 2021.
As the analysts put it, "real income gains from disinflation were mostly saved, not spent," highlighting uncertainty as a key drag on spending.
Labor market strength is the second focal point. Unemployment stood at a record-low 5.7%, and employment rates were high. Yet productivity trends raise concerns.
Output per hour worked was about 2.2% below pre-pandemic levels, while the rest of the euro area saw gains of a similar size.
The brokerage states that "hours worked surged, but productivity is eroding," reflecting a shift toward lower-productivity sectors, particularly construction.
Execution of Italy's Recovery and Resilience Plan is the third issue. By late 2025, Italy had spent about 49% of its total allocation, leaving roughly €100 billion still to be deployed. Actual spending in 2024 reached only 43% of planned levels.
Updated timelines show that spending worth about 1.6% of GDP may be pushed beyond 2026. The brokerage warns that "risks of incomplete implementation are rising and the very last tranche (worth €28 billion) looks challenging."
Public finances form the fourth pillar of investor scrutiny. Italy's 2026 budget confirmed a restrictive stance, with net expansionary measures of less than 0.1% of GDP.
Deficit targets for 2025-28 were revised downward, making an early exit from the EU's excessive deficit procedure possible by mid-2026.
Debt, however, remains the main vulnerability. Public debt is projected to rise until 2027, and the brokerage notes that "the snowball effect has turned unfavourable," implying higher primary surpluses will be needed. Interest expenditure is expected to rise from 3.9% of GDP in 2025 to 4.2% in 2028.
Politics are the fifth consideration, though near-term risks appear limited. The 2026 calendar includes mainly local elections and a constitutional referendum on judicial career separation in March.
The brokerage says the year "poses no significant risk regarding the stability of the current government," with the next general election expected in the second quarter of 2027.
The final and most strategic question is growth potential. GDP growth is expected to rise from 0.5% in 2025 to 0.7% in 2026, still below the euro area average.
Productivity remains Italy's main constraint. The brokerage notes that "weak productivity is the key challenge," adding that it is "too early to tell" whether recovery plan reforms will lift potential growth, calling it "a test Italy cannot afford to fail."