The Bank of Italy bumped up its view for 2026 and explained why. The institution said the Middle East crisis ended up having a milder impact than it had estimated in June over January-June of this year, and pointed as well to stronger investment in digital and energy transitions plus a tourism lift in the summer months.
This year, growth is now put at 0.9% after adjusting for working days, up from June's 0.5% call. Without that adjustment, the projection rises to as much as 1%, which matches the government's view. The bank also said planned outlays for defense and energy will add to activity. Further out, it sees the economy expanding 0.7% in 2027 and 0.8% in 2028.
The central bank noted that "core inflation has risen slightly." Its forecast has consumer prices averaging 3.2% in 2026, with the high point reached in the fourth quarter, and then easing; the expected rates are 2.4% for 2027 and 1.7% for 2028. The Iran war has pushed up energy prices, putting pressure on citizens across the euro area.
The cabinet has approved the budget for next year, balancing tax cuts and aid for families and businesses with a cautious fiscal approach aimed at keeping the deficit under the European Union's 3% of GDP cap. This will be the final budget ahead of next year's elections, arriving as Meloni contends with greater investor scrutiny, a less cohesive coalition, and competition from far right rival Roberto Vannacci.
Finance Minister Giancarlo Giorgetti warned of "storm clouds" and the need to keep finances on course. Meloni has requested additional flexibility from the EU for energy and defense under the national escape clause. The government plans about €28 billion over two years, equal to 1.2% of GDP, which is €7 billion below earlier defense plans.
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In bonds, the gap between Italian and German 10-year yields sits near 107 basis points, slightly tighter after reaching its highest level in more than a year earlier this month. That remains well under the 200-plus basis points recorded at the start of Meloni's term in 2022.
A slightly stronger growth path, paired with a budget aimed at discipline, can be supportive for Italian assets, while a tighter BTP-Bund spread signals investors are not demanding a large risk premium right now. If inflation peaks in 2026 and then eases, it sets a clearer line for rates and funding costs for Italian corporates. The bottom line: track how energy and defense spending rolls out and whether the deficit stays under the EU cap, because those will shape earnings for Italy-exposed stocks and how wide or tight that spread runs.
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