Based on the description provided, Italy is currently in the expansion phase of the business cycle.
Explanation: The signs of improvement, such as citizens returning to work, increased production, and renewed consumer spending, indicate that the economy is recovering from a previous downturn. This aligns with the expansion phase, which is characterized by rising economic activity, increased employment, and growing consumer confidence following a period of contraction. The mention of previously tough times suggests that Italy has just emerged from a trough and is now experiencing recovery and growth.