Bank of Italy says renewed Middle East hostilities have worsened euro area and Italian growth and inflation outlooks

The Bank of Italy published an economic assessment saying renewed hostilities in the Middle East have reignited market tensions, raised energy prices and worsened the outlook for growth and inflation in the euro area and Italy. Oil and natural gas prices rose again in July and remain above pre-conflict levels, while sovereign yields have increased on expectations of tighter monetary policy and the dollar has strengthened. World trade grew in the first quarter but is expected to slow in the second half because of supply chain tensions linked to the conflict and uncertainty over a deal between the United States and Iran. For the euro area, GDP grew 0.3 per cent in the first quarter, excluding exceptional fluctuations in Ireland, but the Middle East crisis weighed on activity in the spring months. June Eurosystem projections put euro-area GDP growth at 0.8 per cent in 2026, 1.2 per cent in 2027 and 1.5 per cent in 2028, with inflation rising to 3.0 per cent in 2026 before easing to 2.3 per cent in 2027 and 2.0 per cent in 2028. In Italy, GDP also grew 0.3 per cent over the winter months and appears to have slowed in the second quarter as investment and household consumption softened. Bank of Italy's June projections show GDP rising by 0.5 per cent in 2026, 0.4 per cent in 2027 and 0.9 per cent in 2028 in the baseline scenario, with growth this year potentially reaching 0.6 per cent after a stronger first quarter. Inflation reached 3 per cent in the second quarter and is projected to average 3.1 per cent this year, while employment remained firm, unemployment fell to a new all-time low, and lending to firms accelerated between February and May.