The recovery continued at a moderate pace in 2016, driven by domestic demand. But consumption has lost its role as the leading growth driver because of higher uncertainty and waning consumer confidence. And yet employment has increased and wages have risen in real terms thanks to low inflation. On the other hand, unemployment has only seen a slight decline due to higher activity rates. Investment saw a marginal increase (by far the most dynamic component being transportation equipment). Exports rose slightly due to lower sales towards non-EU member countries. Corporate insolvencies have declined by 6.6% in 2016. Growing political instability, which adds to uncertainty about the banking sector could weigh on the attitude of households and businesses in 2017. This would be likely to curb consumption and private investment. Despite fiscal support measures and more favourable financing conditions, the latter remains deficient due to sluggish corporate margins and the weakness of demand and credit supply. The downward adjustment of payroll tax exemptions granted under the new permanent contracts should also slow the progress of employment. Nevertheless, public investment is expected to increase and exports would benefit from a moderate increase in foreign demand.

Fiscal policy has been eased since the crisis in an effort to aide recovery. This trend should continue in 2017, the budget providing for measures to stimulate investment, lower corporate tax rates and an increase in small pensions. The authorities should negotiate budgetary measures with Europe to accommodate spending related to the earthquake and the migration crisis. The decline in the primary surplus (excluding debt service charges) should be offset by a further reduction in interest payments. The debt burden is expected to remain at a very high level but stable thanks to low interest rates and GDP growth. However, it will remain an important source of vulnerability, even given the fact that risks are mitigated by the relatively long maturity of debt (almost 7 years), its significant proportion at fixed rates and the fact that the residents hold 2/3. The country has suffered from de-industrialisation but its manufacturing sector still accounts for a significant part of its economy (15% of GDP). Italy is the second manufacturing power in Europe and seventh worldwide. This industry is up selling, continuing a highly profitable niche strategy (luxury clothing, household goods, food processing, mechanical, goods, motor vehicles), and for many years has achieved a large trade surplus. Tourism revenues are not left out, thanks to major heritage assets, but are offset by significant costs of transport. The current account would remain largely positive in 2017, the slight increase in energy costs was offset by the moderation in domestic demand and a slight increase in foreign demand.

Doubtful receivables are at a high level, some 18% of bank portfolios. The results were very mixed for the sector in the last stress tests conducted by the European Banking Authority (July 2016). They revealed that Unicredit could not forego another recapitalisation while the worst result in Europe was displayed by Monte dei Paschi di Siena (3rd Italian bank) whose rescue plan includes a capital increase of at least 5 billion euros. This bank is struggling to raise fresh funds on the markets, which could result in State intervention.

Matteo Renzi, whose term of office started in 2014, relied on his political reforms to end chronic governmental instability in the country. He took a chance on customising the Senate, which was rejected in a referendum in December 2016. His resignation opens a new period of political uncertainty. The President of the Republic asked Paolo Gentiloni, of the Democratic Party (PD) in power, to lead the government until elections were held in February 2018. The latter will manage the banking crisis and harmonise the electoral laws that apply to the lower house and the Senate. His durability will be at the mercy of a vote of no confidence. In the current state of these laws, in case of early elections, Beppe Grillo's Five Start Movement, neck-and-neck with the PD in the polls, could win a majority in the lower house.