The economic outlook for Italy has gradually worsened in early 2025, as Italian businesses grow increasingly concerned about the prospects of a new international trade war undermining growth.
GDP forecasts for 2025, ranging between 0.8% and 1%, suggest a modest rebound from the estimated 0.5% in 2024. However, these forecasts may underestimate risks associated with President Donald Trump’s re-election and his proposed tariffs on European imports, which could exacerbate slowing euro area growth and reduce international demand. The US is a major trade partner for Italy. In the first eight months of 2024, Italian exports worth €43.3bn went to the US, according to data cited by BNP Paribas. Italy’s substantial trade surplus is at risk of unwinding under Trump’s protectionist stance, posing risks to Italy’s export-driven sectors.
Domestic demand is expected to drive Italy’s growth in 2025, according to the Italian National Institute of Statistics (INIS). A recent Bank of Italy (BoI) survey highlights expectations for investment expansion in the first half of the year. However, firms report unfavourable investment conditions due to economic, political and trade uncertainties.
The OECD offers a mixed outlook for the year. While the phase-out of the Superbonus housing renovation tax credit weighs on construction activity, accelerated spending under Italy’s Recovery and Resilience Plan (RRP) could bolster growth, partially offsetting external headwinds. Headline inflation for 2025 is expected to drop to 1.1%, according to the European Commission, as energy prices stabilise. Additionally, moderating wage pressures will provide some relief. Meanwhile, the ECB is expected to continue cutting rates, with Capital Economics forecasting a gradual decline from the current 3.0% to 1.5% by Q3 2025.
Italy needs growth to help it meet the European Union’s deficit and debt targets of below the EU’s 3% limit by 2026. In 2024, the government deficit was forecast to have fallen to 3.8% of GDP, from 7.2% in 2023. In 2025, deficit is forecast to further decrease to 3.4%, followed by 2.9% in 2026, according to the European Commission.
Banking sector consolidation
Consolidation is reshaping Italy’s banking sector as banks pursue scale, capital optimisation, and deeper technology integration in managing distressed assets and loan sales, within a rapidly evolving regulatory framework. However, recent trends show a notable pivot towards traditionally rare unsolicited offers.
In mid-December, UniCredit formally launched a €10.1 billion all-share voluntary public exchange offer for Banco BPM as the bank aims to strengthen economies of scale and its European presence. It follows UniCredit’s attempted acquisition of Germany’s Commerzbank, when it first acquired a 9% stake in September. UniCredit’s stake in Commerzbank has risen to 28%. However, the German government are concerned over impact of the acquisition on Germany’s financial sovereignty.
UniCredit’s bid for BPM has similarly troubled the Italian government as the deal risks its plan to broker a merger between BPM and state-backed Monte dei Paschi di Siena. On January 8, Banco BPM filed an antitrust complaint, describing the bid as a “killer acquisition” designed to eliminate competition and derail its planned Anima Holding acquisition. The offer also faces political resistance, with the Italian government considering invoking “golden power” to protect Banco BPM as a strategic asset. Analysts believe UniCredit may need to substantially increase its bid to win shareholder approval, signalling a contentious and potentially prolonged negotiation.
In early January, Banca Ifis announced a voluntary public purchase and exchange offer to acquire 100% of Illimity Bank, valuing the transaction at approximately €298 million. If successful, the deal will enhance Banca Ifis’s position in the specialty finance sector, expand its SME client base, and deliver annual synergies estimated at €75 million. It would also improve cost efficiency and provide access to new market segments but remains subject to regulatory approvals.
NPL outlook
Italy’s non-performing exposures (NPEs) rose slightly to €54.8 billion in H1 2024, according to PWC, ending a decade-long decline, driven by €17.0 billion in annual inflows after years of stabilisation. The increase in NPEs was driven by Italian bank lending to German and French corporates. Unlikely-to-Pay (UtP) remain the main component (53.8%) of deteriorated loans. The stock of bad loans decreased to €19.6bn, while the past due stock slightly increased to €5.7bn.
Chart 3: Breakdown of Gross Bad Loans by economic sector (H1-2024)
Source: PwC analysis on Banca d’Italia «Banche e istituzioni finanziarie: condizioni e rischiosità del credito per settori e territori», June 2024.
Default rates in Italy are expected to rise modestly over the next 12 months, with sector-specific challenges in manufacturing and broader European trends in the commercial real estate (CRE) and SME sectors. Despite this, Italy’s banking system showed resilience, with a 17% drop in Stage 2 loans to €177 billion.
Annual NPL transactions were forecast to reach €11.4 billion in 2024, reverting to pre-2017 levels, reflecting both lower NPE stock in the banking system and somewhat adverse macroeconomic conditions. However, sale prices of NPL portfolios are modestly increasing, due to increased competitiveness and reduced volumes. Banks have prioritised de-risking and risk-sharing strategies through originate-to-distribute models.
Chart 1: NPL transactions trend in the Italian market (€bn)
Source: PwC estimates on public information and market rumours.
Over the next two years, annual NPL transaction volumes are forecast at €18bn and €5bn, respectively, according to Banca Ifis. Additionally, over the 10 years to 2024, total NPEs in Italy have decreased by around €71bn which will rise to €84bn by 2026.
Chart 2: Estimated amount of total Italian NPEs in Italy (€ billions)
Source: Banca Ifis Research Department; internal estimates from Banca Ifis’s NPL Market Database, the Bank of Italy, Unirec and servicer budgets.
While primary NPE sales are expected to remain subdued, secondary market activity grew, representing 30% of total transactions in 2024. Regulatory shifts, including the Secondary Market Directive, will increase the number of potential buyers in NPL market, but in the meantime, it will require the adoption of a new regulatory framework for the management of NPLs and increased oversight by Bank of Italy on secondary transactions participants.
Tags: 2025, Italy, NPL, outlook
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