Italy's economic recovery is on a firmer footing due to robust externaldemand and a reduction of systemic risks in the banking sector.
However, headwinds will build heading into 2018 as general electionsapproach and monetary policy becomes less supportive.
Growth will become harder to come by as employment gains slowand productivity growth remains relatively weak.
Italy's general election, due by May 2018, represents the mostprominent source of political risk facing the eurozone over the comingyear.
The pro-EU Democratic Party could still lead the next government,although it will face challenges from the anti-establishment Five-StarMovement and a right-wing alliance composed of Forza Italia andthe Northern League, all of which champion eurosceptic platforms.
Italy's public shows the highest levels of euroscepticism in theeurozone following years of weak growth, implying that even if theupcoming election keeps the status quo intact, leaving the singlecurrency area will remain a part of the political discourse over thelong term.
Low borrowing costs and European Central Bank support will becrucial in maintaining fiscal stability over the coming years. Italy'smassive public debt load and weak growth outlook remain amongthe most pertinent threats facing the eurozone, with the pace of debtreduction to be slow even in an optimistic scenario.
Even if reforms aimed at addressing Italy's decline in productivitygrowth and external competitiveness are accelerated, an ageingdemographic profile will make debt consolidation efforts over thelong term exceedingly difficult.
Major Forecast Changes
We have revised up our real GDP growth forecast for Italy from1.1% to 1.4% in 2017, and from 0.9% to 1.0% in 2018. The upwardrevision for 2017 is mainly due to a brighter outlook for industryand export growth evident in a variety of survey-based and hardeconomic data, which follows a broad-based uptick in global tradeand eurozone economic sentiment in recent months.