"The recovery continues gradually. Export growth is gradually being substituted by domestic demand," the Bank said.
The construction sector in particular, which was hit hard by the country's deep three-year recession, shows encouraging signs. The GDP contracted by 0.4 percent and 1.9 percent in 2014 and 2013 as Italy struggled to recover.
Despite the positive outlook, the Bank warned "significant risks remain" due particularly to "the possibility of a slowdown in emerging economies (which) may be more pronounced and longer lasting" than currently forecast.
The unemployment rate, which stood at 11.3 percent in November -- the lowest level for the past three years -- is expected to drop under the 11 percent mark by 2017, it said.
Increased demand and "labour cost reduction measures introduced by the government" should boost employment.
Inflation, which averaged 0.1 percent in 2016 according to official figures released Friday -- its lowest level since 1959 -- is expected to edge up to 0.3 percent in 2016 and 1.2 percent the following year, the Bank said.