By Gavin Jones
ROME (Reuters) - Italy's economy stagnated in the third quarter, and Prime Minister Giuseppe Conte said the zero growth justified Rome's expansionary 2019 budget which the European Commission has rejected because it breaks EU rules.
Gross domestic product was unchanged between July and September, following a 0.2 percent rise in the second quarter, and was up just 0.8 percent on an annual basis, national statistics bureau ISTAT reported.
The flat quarterly reading was the weakest since the fourth quarter of 2014, and continues a steady slowdown in Italian growth over the last 18 months.
"The figures were expected, which is why we presented an expansionary budget," Conte told reporters during a visit to India.
Deputy Prime Minister Matteo Salvini, who is in Doha, gave the same message. "The slowing GDP is another reason to go full steam ahead with the budget," he said on Facebook.
This month the government, which took office in June, cut the full-year 2018 GDP growth forecast to 1.2 percent from a 1.5 percent projection made in April by the previous administration.
After the third quarter stagnation, achieving even the revised target would need a strong acceleration at the end of the year.
The new coalition of the anti-establishment 5-Star Movement and the right-wing League has presented a big-spending 2019 budget it says is needed to prevent Italy's chronically sluggish economy slipping into another recession.
However the budget, which targets the deficit to rise to 2.4 percent of GDP in 2019 from 1.8 percent this year, was rejected last week by the European Commission.
The EU executive said Italy was flouting a previous commitment to lower the deficit steadily towards a balanced budget, and gave Rome three weeks to present a new budget. The government says it has no intention of changing its plans.
Yields on Italian government bonds rose after the GDP data and the euro fell.
ISTAT said neither trade flows nor domestic demand had made any contribution to economic growth in the third quarter.
It gave no numerical breakdown of components with its preliminary estimate, but said the services and agricultural sectors expanded while industry was a drag on growth.
The government has forecast growth will accelerate to 1.5 percent next year thanks to increased investment, tax cuts and a new income support scheme, known as the "citizens' wage", which it says can boost consumer spending.
While the weak economy may strengthen Rome's argument that fiscal expansion is needed, the coalition's forecasts - which were already above those of virtually all independent economists - now look increasingly optimistic.
The third quarter data "puts an end to the expectations that the government has that they can base their budget on their current growth projections", said ING rates strategist Benjamin Schroeder.
Separately, ISTAT reported that business confidence dropped in October to its weakest for almost two years, but morale improved among consumers, possibly buoyed by the budget's planned tax cuts, welfare benefits and early-retirement option.
(Additional reporting by Abhinav Ramnarayan; editing by David Stamp)