Rising confidence across services and retail offers a cautious lift to Europe’s third-largest economy, even as factories struggle to regain momentum

Rome — Confidence is stirring again across Italy’s business landscape as the year draws to a close. Surveys released this month show that overall business and consumer morale strengthened in December, marking the most upbeat reading since early last year. The improvement does not erase the country’s structural challenges or its modest growth outlook, but it does signal a shift in tone after months of hesitation among firms and households.

Economists and executives alike describe the change as tentative but meaningful. After a prolonged period of uncertainty driven by high borrowing costs, volatile energy markets and weak demand across much of Europe, Italian companies are reporting a more stable operating environment. Consumers, too, appear marginally more willing to spend, encouraged by easing inflationary pressure and a labor market that has held up better than many had feared.

The brighter mood is not evenly spread across the economy. Services, retail and construction are leading the recovery in confidence, while manufacturing remains the clear laggard. Italy’s factories, deeply integrated into European and global supply chains, continue to face soft foreign demand and intense competition, particularly in energy-intensive segments and traditional exports.

Still, the overall uptick matters. Italy is the euro zone’s third-largest economy, and its performance has an outsized influence on regional growth. Even a modest improvement in sentiment can help unlock investment decisions that were previously postponed, supporting activity in the months ahead.

“Businesses are not suddenly euphoric, but they are less defensive,” said one Milan-based economic analyst. “There is a sense that the worst of the uncertainty may be behind us, even if the path forward remains narrow.”

Service companies report fuller order books and more predictable demand from both domestic and foreign clients. Tourism-related activities continue to benefit from Italy’s enduring appeal, while professional services and logistics firms note steadier contracts after a volatile stretch. Retailers, particularly those focused on essential goods and mid-range products, are seeing a gradual normalization in customer traffic.

Construction has also contributed to the improvement in morale, supported by ongoing infrastructure projects and a slower-than-expected cooling in residential renovation activity. While generous incentive schemes of the past have faded, companies in the sector say planning visibility has improved, allowing them to manage costs and staffing with greater confidence.

Manufacturing tells a different story. Factory managers remain cautious, citing weak orders from key European partners and persistent margin pressure. Although energy prices are no longer at crisis levels, they remain a concern for producers with thin profit buffers. Investment plans in machinery and capacity expansion are therefore being reviewed carefully, often scaled back or phased over longer horizons.

Export-oriented manufacturers are particularly sensitive to the broader European slowdown. Germany’s subdued industrial performance continues to ripple across supply chains, affecting Italian producers of components, machinery and intermediate goods. As a result, manufacturing sentiment, while no longer deteriorating sharply, has yet to join the broader upswing seen elsewhere.

Households, meanwhile, are showing signs of renewed confidence. Consumer morale improved alongside business sentiment, reflecting a perception that price pressures are easing and that employment prospects are relatively secure. Wage growth has not fully caught up with past inflation, but the stabilization of purchasing power is helping families plan their spending with slightly more assurance.

This matters for Italy, where domestic consumption plays a critical role in sustaining growth when exports falter. Even small changes in household behavior can have a noticeable impact on retail, services and small businesses that form the backbone of the economy.

Policy also looms in the background. Companies are closely watching signals from European monetary authorities as they look ahead to the coming year. Expectations that borrowing conditions may gradually become less restrictive are feeding into the improved mood, particularly among small and medium-sized enterprises that depend heavily on bank financing.

At the same time, uncertainty has not disappeared. Firms remain wary of geopolitical tensions, potential disruptions to trade routes and the risk of renewed volatility in energy markets. Public finances are another area of concern, as Italy balances the need to support growth with commitments to fiscal discipline at the European level.

The government has sought to frame the latest sentiment data as evidence that reforms and investment plans are beginning to bear fruit. Officials point to progress in digitalization, infrastructure upgrades and the deployment of European recovery funds as factors underpinning resilience. Critics, however, argue that confidence alone will not be enough to lift Italy onto a stronger growth path without deeper productivity gains.

For now, the improvement in morale offers a rare piece of good news in a subdued economic landscape. It suggests that businesses and consumers are adapting to a more challenging environment rather than retreating from it. Whether this cautious optimism can translate into sustained growth will depend on external demand, policy choices and the ability of Italian firms to innovate and compete.

As the calendar approaches its final days, the message from surveys is clear: confidence is no longer sliding, and in some corners it is quietly rebuilding. For an economy that has spent much of the past year navigating uncertainty, that shift in mood could make a tangible difference in the months ahead.