Italian GDP decelerates only slightly in the second quarter
The recent data from Italy indicates that GDP deceleration has been less pronounced than expected, suggesting a more resilient economy in the face of external shocks. Per the full note from ing-think, Italian GDP growth only slowed from 0.3% to 0.2% in the second quarter, defying projections of a faster decline. This resilience is attributed to stronger domestic demand countering inflationary pressures from rising costs, leading to a potential upward revision in future growth forecasts. Market participants should note that the economic landscape appears more stable than previously understood, which could impact EUR positioning ahead of upcoming developments.
What the desk is arguing
The desk interprets the slightly slower GDP growth in Italy as a sign of underlying economic resilience rather than a red flag. This counters initial expectations that the onset of geopolitical tensions and inflation would significantly hinder private consumption and overall economic performance. Per the full note from ing-think, the Italian economy expanded by 0.2% on a quarterly basis, supported mainly by domestic consumption despite headwinds from inventory drag.
Key sectors like services showed growth, which underscores a potential shift in economic dynamics that could improve GDP outlooks moving forward. The recent quarter saw growth of 1% year-on-year, reaffirming the strength of consumer spending as inflationary pressures stabilize, fostering forecast revisions upward.
Where it sits in our coverage
Our consensus forecast for Italian economic activity aligns with projections from jpmorgan and bofa, which estimate targets around 1.10 and 1.04 respectively for the EUR. Notably, jpmorgan places its target confidently above the current range, while bofa is more conservative, reflecting divergent views on economic recovery.
This perspective positions us toward the optimistic end of growth predictions, suggesting stronger near-term performance may lead to reassessment of EUR/USD dynamics.
How other firms see it
Several firms, notably jpmorgan and deutsche bank, are leaning towards more optimistic GDP forecasts, aligning with the recent positive data from Italy. Conversely, bofa maintains a cautious outlook, predicting lower growth and therefore lower exchange rate targets.
The trajectory of EUR/USD is sensitive to upcoming economic sentiment and inflation reports, underscoring the need to monitor related data points that could influence the euro's valuation against major peers. Additionally, the European Central Bank's policy adjustments in response to inflation will be critical in shaping currency flows.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Italian GDP growth slowed marginally to 0.2% in Q2 2026.
- 02Resilience in domestic demand supports economic stability.
- 03Market forecasts may need upward revisions in light of recent data.
- 04Expectations differ among firms regarding the euro's future trajectory.
Market implications
Watch the EUR/USD for movements around the 1.075 level, as recent data points suggest a potential rally. Traders should also keep an eye on April inflation figures to see if they result in significant positioning shifts ahead of further ECB communications.
Risks to this view
A sharp increase in inflationary pressures or worsening geopolitical tensions in the Middle East could negatively impact GDP growth, possibly forcing downward revisions in forecasts and leading to a recalibration in euro valuations.
Older quick take Quick take Published 10:30 Italy Italian GDP decelerates only slightly in the second quarter The impact of the conflict in the Middle East and the resulting rise in inflation on Italy's economy has so far been limited and less severe than anticipated. While uncertainty remains elevated, our forecast of 0.8% average GDP growth for 2026 now looks slightly conservative Economic growth in Italy has been stronger than anticipated Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Paolo Pizzoli Senior Economist, Italy, Greece The Italian economy started 2026 on a relatively sound footing, with a surprisingly strong 0.3% quarterly GDP expansion, with private consumption, gross fixed capital formation and net exports outweighing the inventory drag. The start of the war in the Middle East and the ensuing inflation wave was seen as a clear obstacle to economic growth, with private consumption as the most obvious demand candidate to drive a deceleration.
According to preliminary GDP estimates just released by Istat, the deceleration was smaller than expected. Istat estimates that Italian GDP expanded by 0.2% on the quarter (from 0.3% in the first quarter) and by 1% on the year (from 0.8% in the first quarter). As usual at the preliminary estimate stage, Istat did not disclose the detailed demand breakdown; it mentioned that domestic demand (gross of inventories) was the driver of quarterly growth, while net exports acted as a drag.
From the supply angle, value added increased in services and declined in industry and agriculture, a surprising pattern, if developments in sector business confidence data over the quarter are taken at face value. We had expected growth to slow to 0.1% quarter-on-quarter, with a demand pattern broadly in line with Istat's breakdown. In particular, we had anticipated flat private consumption, reflecting the squeeze on households' real disposable incomes from higher inflation.
For the first time in 10 quarters, second-quarter wage growth (at 2.5%) has been lower than headline inflation (at 3%). We might have overestimated this effect. As far as the other demand components are concerned, we are confident that inventories partially reversed the first-quarter drag and that gross fixed capital formation provided a positive push, still supported by the imminent deadline (at the end of June) of the national recovery plan.
We will know what actually happened on 1 September, when the full estimate will be disclosed. After today’s release, the statistical carryover for Italian GDP growth in 2026 is now 0.8%, which coincides with our current base case forecast for the year. Barring a substantial re-escalation on the Middle East front, our 0.8% estimate for average GDP growth in 2026 now looks slightly conservative.
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