Italy Is Creating Jobs. So Why Is the Economy Barely Growing?

There is a comforting way to read Europe’s latest economic numbers.

And then there is the uncomfortable one.

Eurostat has just revised second-quarter 2026 growth significantly upward. Between April and June, real GDP increased by 0.6% quarter-on-quarter in the euro area and 0.7% across the European Union.

Only a few weeks earlier, the estimates had been 0.4% and 0.5%.

On an annual basis, GDP was 1.2% higher in the euro area and 1.4% higher across the EU.

That sounds encouraging.

But look at Italy.

Italian GDP grew only:

0.2% quarter-on-quarter

and

1.0% year-on-year.

At the same time, Italian employment continued to increase.

This produces one of the most important — and least politically convenient — questions about the Italian economy:

If Italy keeps creating jobs, why does the economy remain so weak?

The answer takes us directly into the structural problem Italy has avoided for decades.

Employment is growing. Productivity is not growing enough. Real wages remain depressed. And adding workers to a low-productivity economy is not the same thing as making that economy richer.

First, Europe Did Better Than Expected

The European figures deserve recognition.

The euro area’s 0.6% quarterly expansion was not trivial.

After GDP had essentially stagnated in the first quarter, the second quarter represented a genuine acceleration.

But even here, the composition matters more than the headline.

Household consumption contributed +0.2 percentage points to quarterly growth.

Government consumption contributed essentially nothing.

Gross fixed capital formation — investment — contributed essentially nothing in the euro area and just +0.1 percentage points in the EU.

Inventories subtracted 0.5 percentage points.

And net exports contributed an extraordinary:

+0.9 percentage points in the euro area

and

+0.8 percentage points in the EU.

That should immediately temper the celebrations.

Europe grew.

But the engine was overwhelmingly external.

Exports increased by 3.4% in the euro area, while imports increased by only 1.5%.

This was not primarily an investment boom.

It was not a public-spending boom.

It was not even primarily a consumption boom.

It was a quarter in which net trade did an enormous amount of the work.

That is good news.

But it is not necessarily evidence that Europe’s internal growth machine has suddenly been repaired.

And the Latest Data Already Offer a Warning

The next indicators are less euphoric.

Eurostat reported that euro-area retail trade volumes fell 0.6% month-on-month in July, including a 1.4% decline in non-food products.

Services production fell 0.3% in June in the euro area.

And the flash estimate for August put euro-area inflation back at 3.3%, up from 2.9% in July.

So one very strong GDP revision should not be confused with the definitive arrival of a new European boom.

Europe is recovering.

It is not flying.

Spain 0.7%. Germany 0.3%. Italy 0.2%.

Now the politically uncomfortable comparison.

During the second quarter:

Spain grew 0.7%.

Germany grew 0.3%.

Italy grew 0.2%.

France was broadly flat.

Ireland posted an extraordinary 10.2%, although Irish GDP is notoriously distorted by the accounting activities of multinational corporations, so using Ireland as a normal comparator would be economically misleading.

Spain is the more revealing comparison.

Because Spain and Italy are both large Southern European economies.

Both suffered deeply during the euro crisis.

Both benefited from European recovery funding.

Both operate under the same ECB monetary policy.

Both are exposed to energy prices and European regulation.

Yet their growth trajectories have diverged substantially.

That makes it increasingly difficult to explain Italy’s weak growth simply by pointing at “Europe”.

Italy’s Labour Market Is the Good News

There is a genuine Italian success story, and it should not be dismissed simply because it complicates the argument.

Employment has performed remarkably well.

The OECD reports that Italy’s unemployment rate fell to 5% in May 2026, a record low and essentially equal to the OECD average of 4.9%.

Italy’s employment rate reached a record 62.8% in Q1 2026, following particularly strong employment growth during the previous two years.

That matters.

Millions of political arguments about Italy have been based on the idea that the country simply cannot create jobs.

It can.

The problem is different.

Despite reaching a record, Italy’s employment rate remains 9.3 percentage points below the OECD average of 72.1%.

And employment growth itself has recently started slowing.

So Italy simultaneously has:

record employment

and

one of the lowest employment rates in the developed world.

Both statements are true.

That is precisely why economic statistics require context.

The Bigger Paradox: More Workers, Very Little GDP

This is where the numbers become uncomfortable.

If employment rises while output barely rises, the economy is not necessarily becoming dramatically more efficient.

It may simply be using more labour to produce modestly more output.

And Italy has an exceptionally long history of this problem.

The OECD’s 2026 Economic Survey is remarkably explicit.

Italian labour-productivity growth has lagged other advanced economies for decades.

It has remained below the euro-area average since the mid-1990s.

Productivity essentially stagnated after 2010, notwithstanding some improvement between 2019 and 2022.

Even more strikingly, the OECD reports that multifactor productivity declined between 2000 and 2022.

That is the real Italian disease.

Not unemployment alone.

Not taxation alone.

Not Brussels alone.

Not immigration.

Not the euro.

Not whichever government happens to be in power today.

Productivity.

You Cannot Become Richer Simply by Adding More Hours

An economy has essentially two broad ways of increasing output.

More labour can be used.

Or each hour of labour can produce more value.

The first strategy has limits.

The second is productivity.

Italy has relied too heavily on the first.

The OECD notes that during the decade through 2024, increased hours worked were an important driver of Italian GDP growth.

But Italy is ageing.

Its working-age population will eventually shrink.

That means an economic strategy dependent on continuously adding labour inputs eventually collides with mathematics.

Italy needs each worker — and each hour worked — to produce more economic value.

That requires capital.

Technology.

Education.

Digitalisation.

Larger firms.

Better management.

Research.

Infrastructure.

Competition.

And investment.

Not simply another employment record.

The Wage Numbers Destroy the Celebration

There is an even more immediate reason why Italians may not feel the employment miracle.

Real wages.

According to the OECD, Italian real wages in the first quarter of 2026 remained:

6.1% below their Q1 2021 level.

That was the largest remaining real-wage loss among the major OECD economies.

Another OECD measure, looking at contractual wages, found that real contractual wages were still 8.8% below January 2021 levels after the inflation shock.

Read that again.

Employment is at record levels.

Unemployment is at record lows.

Yet workers have still not fully recovered the purchasing power they had five years ago.

That is not a contradiction.

It is the central feature of the Italian labour market.

A Job Is Not an Economic Unit of Equal Value

Political debate frequently treats employment numbers as though every additional job represented an identical economic contribution.

It doesn’t.

One additional engineer designing semiconductors is a job.

One additional waiter is a job.

One AI researcher is a job.

One seasonal tourism employee is a job.

One pharmaceutical scientist is a job.

One delivery driver is a job.

The employment statistics count people.

GDP measures value added.

Productivity connects the two.

That distinction matters enormously for Italy.

The OECD notes that recent employment growth has particularly benefited lower-skilled and lower-paid occupations, whose wage rates have also risen less than those of higher-income workers.

Creating jobs is unquestionably better than destroying them.

But the next objective must be creating more productive jobs.

Otherwise Italy risks becoming an economy that is extremely successful at keeping people busy without becoming substantially richer.

The Small-Firm Problem Nobody Likes Discussing

Italy loves its small businesses.

And for good reason.

They represent entrepreneurship, family capital, local knowledge, manufacturing expertise and extraordinary industrial traditions.

But economically, romanticism has a cost.

The OECD identifies Italy’s unusually high concentration of employment in small firms as one reason aggregate productivity remains weak.

Italian companies often perform reasonably well compared with foreign companies of similar size.

The problem is that Italy has too few larger companies, and larger firms tend to be more productive.

This distinction is critical.

The problem is not necessarily that the Italian entrepreneur is inefficient.

It is that too many successful Italian businesses remain small.

Scale allows companies to spread fixed costs.

Invest more in technology.

Hire specialised management.

Finance R&D.

Enter global markets.

Automate.

Build brands.

Access capital markets.

Smallness can be beautiful.

Economically, permanent smallness can also be expensive.

Italy Has Another Problem: Capital

High-productivity economies require capital.

Italy still relies disproportionately on bank financing.

The OECD describes Italian capital markets as relatively shallow, limiting non-bank financing particularly for innovative companies with high investment requirements and little collateral.

This matters enormously in an economy increasingly dominated by:

AI,

software,

biotechnology,

semiconductors,

automation,

advanced manufacturing,

energy technology,

and intangible intellectual property.

A bank is very comfortable lending against a building.

It is much harder to collateralise an algorithm.

The future economy therefore requires equity capital, venture financing, institutional investors and deep capital markets.

Europe has this problem.

Italy has it more severely.

Then There Is Demography

The employment story becomes even more complicated when demographics enter the picture.

Italy’s population continues to shrink and age.

ISTAT’s provisional figures put the resident population at approximately 58.94 million at the end of May 2026, slightly lower than at the beginning of the year.

An ageing country cannot indefinitely compensate for low productivity by simply adding workers.

Eventually there are fewer workers available to add.

This is why productivity is not an academic obsession.

It is arithmetic.

The PNRR Makes the Current Performance More, Not Less, Important

Italy is also operating during an exceptional period of European investment support.

The National Recovery and Resilience Plan has provided reforms and investment on a scale unlikely to be repeated indefinitely.

The OECD explicitly credits PNRR reforms and investment with helping address structural weaknesses and supporting Italy’s recent resilience.

That should lead to an uncomfortable question:

If Italy is growing only modestly while extraordinary European investment is still flowing through the economy, what happens when that impulse fades?

This is why 0.2% quarterly growth cannot simply be presented as another positive number.

Context changes its meaning.

And Italy Still Carries the Debt

Slow productivity would be problematic in any economy.

In Italy it interacts with another structural constraint:

public debt.

The OECD warns that Italy’s debt ratio remains under pressure even as the fiscal deficit has improved, while ageing, pensions, defence, climate investment and other expenditure requirements will increase future demands on public finances.

Debt sustainability ultimately depends on the relationship between:

economic growth,

interest rates,

inflation,

primary fiscal balances,

and the existing debt stock.

The faster nominal GDP grows sustainably, the easier the arithmetic becomes.

Persistent real growth around 0–1% leaves very little room for error.

This Is Why 0.2% Matters

One quarter never defines an economy.

Italy could outperform next quarter.

Germany could contract.

Spain could slow.

GDP estimates will be revised again.

But Italy’s 0.2% is interesting because it fits a much longer pattern.

Weak productivity.

Low potential growth.

Small firms.

Limited scale.

Insufficient capital-market depth.

Ageing.

High debt.

And wages struggling to regain lost purchasing power.

Those are not quarterly problems.

They are structural ones.

And Europe Should Not Celebrate Too Early Either

Europe’s 0.6% quarter deserves cautious optimism.

But look underneath it.

Net exports contributed 0.9 percentage points.

Investment contributed essentially zero in the euro area.

Government consumption contributed essentially zero.

Household consumption contributed 0.2 points.

This means the headline number was stronger than the domestic-demand story underneath it.

Meanwhile August inflation has accelerated to an estimated 3.3%.

Retail sales fell in July.

Services production weakened in June.

Europe therefore has evidence of recovery.

It does not yet have evidence of a self-sustaining economic renaissance.

That distinction matters.

Italy’s Political Debate Is Asking the Wrong Question

Governments naturally celebrate employment records.

Oppositions naturally emphasise weak GDP.

Both can be statistically correct.

Neither necessarily explains what is happening.

The more useful question is:

How much additional value does Italy generate for every additional hour worked?

Because that ultimately determines wages.

Living standards.

Corporate profits.

Tax revenues.

Debt sustainability.

International competitiveness.

And the resources available for healthcare, pensions, education and welfare.

Employment without productivity eventually produces a ceiling.

Productivity without employment can produce inequality.

A successful economy needs both.

The Most Damaging Number Is Not 0.2%

Italy’s 0.2% quarterly GDP growth will make headlines.

It shouldn’t be the number that worries policymakers most.

This one should:

Real wages remain 6.1% below Q1 2021.

Because that number explains why economic statistics and lived experience can appear to inhabit different countries.

The government can say employment is at record highs.

It is correct.

A worker can say purchasing power has deteriorated.

They are also correct.

Italy can say GDP is growing.

Correct again.

And economists can say productivity remains chronically weak.

Also correct.

All four realities coexist.

Italy Does Not Need More Economic Propaganda. It Needs More Output per Worker.

There is a temptation in politics to convert every decimal point into ideology.

0.2% becomes a government failure.

A record employment figure becomes a government triumph.

Neither interpretation is serious economics.

Italy’s productivity problem predates the current government by decades.

The OECD traces the relative deterioration back to the mid-1990s.

Governments of the centre-left governed during that period.

Governments of the centre-right governed during that period.

Technocratic governments governed during that period.

Coalition governments governed during that period.

Italy changed prime ministers repeatedly.

The productivity problem survived them all.

That is precisely why blaming one government is intellectually easy and economically inadequate.

But the reverse is equally true.

A government cannot claim structural economic success merely because employment reaches a record while GDP, productivity and purchasing power remain weak.

The Real Benchmark Is Spain

For Italy, perhaps the most uncomfortable comparison is no longer Germany.

Germany has its own industrial and demographic problems.

The more interesting comparison is Spain.

Spain grew 0.7% in Q2 against Italy’s 0.2%.

Spain has also been part of the same remarkable Southern European labour-market improvement. The OECD places Italy alongside Spain, Portugal and Greece among the relatively small group of countries where unemployment continued falling while it increased across much of the OECD.

So the old argument that Southern Europe is structurally incapable of growth is becoming harder to sustain.

The question increasingly becomes:

why are some Southern European economies converting the recovery into growth more effectively than others?

That is a much more uncomfortable question for Italy.

And therefore a much more useful one.

The Final Paradox

Italy today presents a strange economic picture.

More people are working.

Unemployment is historically low.

Employment is at record levels.

Yet GDP growth remains modest.

Productivity remains weak.

Real wages have not recovered their 2021 purchasing power.

The population is ageing.

And public debt leaves little room for permanent economic mediocrity.

This is not an economy in collapse.

That description would be false.

But neither is it the economic miracle sometimes implied by employment headlines.

It is something more complicated:

an economy that has become surprisingly good at creating employment, but remains frustratingly bad at converting that employment into productivity, wages and sustained growth.

That is progress.

But it is not enough.

And Europe’s latest GDP revision makes the gap impossible to ignore.

When the euro area grows 0.6%, Spain grows 0.7%, and Italy manages 0.2%, the relevant question is no longer whether Italy is technically growing.

It is:

Why, after decades of reforms, extraordinary European funding, record employment and a favourable labour market, is Italy still satisfied with 0.2%?

Until Italy answers that question, employment records will remain worth celebrating.

But they should never be confused with prosperity.

Roberto Balbino — CEO, Fintech SCB
Independent analyst of finance, economics, geopolitics and global markets.