Italy slashes 2012 growth forecast

Ella Ide
Shoppers walk in Piazza Navona in Rome in 2011. Italy on Wednesday said its recession would deepen in 2012 with the economy shrinking 1.2 percent and delayed a target to balance its budget by 2013, warning there was still "a long way to go."

Italy on Wednesday said its recession would deepen in 2012 with the economy shrinking 1.2 percent and delayed a target to balance its budget by 2013, warning there was still "a long way to go."

"Despite the progress made, there is still a long way to go in a context that is more favourable but still characterised by elements of uncertainty," a report approved by the cabinet that accompanied the new forecasts said.

"The coming months offer a window of opportunity that must be used," it said, pointing to "a further deterioration of the economic situation since December" as the economy entered recession in the second half of last year.

Prime Minister Mario Monti, who came to power in November to replace media magnate Silvio Berlusconi as the eurozone debt crisis hit Italy, had initially vowed to uphold the previous government's pledge to balance its budget by 2013.

His technocrat government has now raised the 2013 deficit target from 0.1 percent of Gross Domestic Product (GDP) to 0.5 percent, which would still be within new EU Fiscal Compact treaty limits.

The government said it would cut the deficit -- the shortfall between revenues and spending to 0.1 percent in 2014 and to zero by 2015.

The International Monetary Fund (IMF) offered a more gloomy outlook on Tuesday, forecasting that Italy's deficit would only be reduced to 2.4 percent this year, 1.5 percent in 2013 and then rise back to 1.6 percent in 2014.

"The reconfiguration of the Italian economy will take several years. We are aware that what we are doing is just the beginning of an operation that will take several years," Monti said at a press conference.

While Monti has been hailed as helping the country through the debt crisis storm which has rattled the eurozone, skittish markets spooked over the outlook for Italy and Spain have again been under pressure in recent days.

Rome paid sharply-higher rates on three-year bonds at a sale last week while Madrid's borrowing costs also rose, although they have eased back this week.

Wednesday's report also said Italy's's massive public debt would drop to 120.3 percent of GDP in 2012 and continue to decrease over the next few years, to 117.9 percent in 2013, 114.5 percent in 2014 and 110.8 percent in 2015.

It also said the economy would start to grow again in 2013 with a 0.5-percent expansion that year, 1.0 percent in 2014, and 1.2 percent in 2015.

The IMF is forecasting Italy's economy will shrink by 1.9 percent this year. "Re-balancing the finances has been accompanied by various reforms aimed at removing the many constraints which have held back Italy's growth potential," Monti said.

"The reforms should boost growth by 2.4 percentage points between 2012 and 2020," he said.

Milan's stock market was down 2.43 percent after the figures were announced.

The revised economic outlook does not come at a good time for Monti who implemented a series of biting reforms to rein in the debt but has struggled to make inroads with his "Grow Italy" plan as his approval ratings begin to wane.

There has been trade union anger in Italy over the government's reform measures and public outrage over a series of suicides linked to the economic crisis.

"The crisis is forcing families, young people, workers and businesses to pay a very high price, and sometimes there are experiences which end in desperation," Monti said.

About 1,000 people voiced their sympathy with the victims of the crisis in a silent protest outside Rome's landmark Pantheon late Wednesday amid calls that everything must be done to stop the suicides.

"The state must find a response to the difficulties of small and medium-sized companies to restart their activities and for the Italian economy to improve," Maurizio Flamini, head of the Rome region's small and medium-sized business lobby, Federlazio, told AFP.

The former eurocrat's government has acted fast to pass reforms to overhaul the pension system and labour market and has imposed budget cuts and tax hikes but as in the eurozone, such policies are taking a toll on growth.