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Successfully investing in Italy

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last updated on 3 July 2023 | reading time approx. 3 minutes

 

 

 

How do you assess the current economic situation in Italy?

The Italian economy was hit early and hard by the pandemic in 2020, but the country has since recovered im­pressively. Economic activity and employment increased much more than expected in 2022. This was also facilitated by the authorities' skillful management of gas supplies and the social assistance provided under Mario Draghi's cabinet in response to the energy price shock. The public debt ratio, while high, declined and non-performing loans remained low. In Q1 2023 Italy's gross domestic product (GDP) on average grew faster than Germany’s and that of the Euro-Countries. The predicted interim recession did not take place and con­sumption as well as investment increased. 

Despite the positive development, as in the rest of Europe, the immediate outlook in Italy is subdued. A resur­gence of inflation, rising interest rates and energy costs and Russia's war in Ukraine are likely to lead to a recession in the Eurozone in 2023. Italy is more vulnerable to external shocks due to its structural economic weakness. The IMF estimates real economic growth of below 1 per cent for 2023.


How would you describe the investment climate in Italy? Which sectors offer the largest potential?

Political risks, high interest rates, weakening demand and higher costs for energy and materials have the poten­tial to dampen the propensity to consume of private households and the propensity to invest of companies. The outlook for investment is nevertheless slightly more optimistic overall than in Q4 2022. The European Recovery Fund offers ample funds for promotion of investment. What is difficult at the moment is the investment in the given time. Nevertheless, increased activity is to be expected, in particular in infrastructure. The EU Com­mis­sion expects gross fixed capital formation to increase by 2.6 per cent in 2023. The statistics office is somewhat more optimistic and estimates a plus of 3 per cent.

In our perspective the traditionally strong sectors in Italy offer great potential, such as food and beverages, lux­ury goods, fashion and design, tourism, mechanical and plant engineering as well as the chemical and phar­ma­ceu­ti­cal sectors. In addition, the electronics and automotive industries and Industry 4.0 are also leading to in­crea­sing investments.


What challenges do German companies face during their business ventures into Italy?

The challenges lie usually in
  • the contractual and payment arrangements;
  • the diverging legal situation in the different regions and increasingly different practical handling of commercial register processes;
  • the cumbersome nature of the institutions (courts, tax offices and other public authorities) and the associated bureaucracy;
  • the strongly unionised working environment and the insufficient efficiency of the labour market, where a positive trend can be seen; and
  • the foreign legal and tax system and the sometimes formalistic approach in the context of tax audits.
Cultural differences and the negotiating skills of Italian business partners should not be underestimated either. Being able to operate in the national language is a decisive advantage. A local management can mitigate not all, but many of these challenges and is usually key to success.

 

Why should companies choose to enter/remain in the Italian market?

Italy is the third largest economy in the Eurozone and the tenth largest in the world. It is an important gateway to the European single market with its 500 million consumers, but also to North Africa and the Middle East with another 270 million potential customers. Italy has a strong network of research institutes, technological centeres and innovative incubators, often linked to universities. Italy promotes investments in technological development with the NRRP (National Recovery and Resilience Plan). In particular, 30.6 billion euros are allocated to improve innovation in the private production system. A large part of the investment is mainly earmarked for Transition 4.0 and the deployment of ultra-fast networks (5G). The main beneficiaries will be SMEs, which will be incentivised to invest in information systems and digital tools for process optimisation.
From a foreign perspective, the capital situation of many Italian companies offers interesting investment opportunities. Cash-rich buyers with strong risk management capabilities can increasingly take advantage in Italy.


In your opinion, how will Italy develop?

Fiscal policy in 2023-24 strikes an appropriate balance between fiscal prudence and growth promotion. Fur­ther­more, making the debt-to-GDP ratio more sustainable will require stronger fiscal consolidation, which should include comprehensive measures to combat tax evasion and expenditure reviews. Ongoing reforms of the public administration, the judicial system and competition are also on track and remain crucial for increa­sing GDP over the medium term. Full implementation of the NRRP could increase Italy's GDP permanently. However, spending of NextGenerationEU funding is behind schedule, mainly due to delays in the imple­men­tation of public investment projects. The priorities of the government should be to swiftly replace the unpro­fitable projects with profitable ones and to strengthen the capacity of the public administration to efficiently manage and implement the public expenditure projects envisaged in the NRRP. Structural reforms and a stable government will thus be crucial to promote growth and reduce the debt ratio.

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