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EU slashes Italian growth outlook, says recession caused by government

EU slashes Italian growth outlook, says recession caused by government
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Francois Lenoir(Reuters)
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By Jan Strupczewski

BRUSSELS (Reuters) - The European Commission slashed its economic growth forecasts for Italy for 2019 and 2020 on Thursday, saying uncertainty over government policies and higher borrowing costs pushed the country into a recession into in the second half of last year.

The Commission said Italian gross domestic product was likely to grow by only 0.2 percent in 2019, down from 1.0 percent in 2018 and against a 1.2 percent growth forecast the Commission made last November.

In 2020, the Italian economy was likely to expand by 0.8 percent, "helped by a positive carry-over effect and two more working days", the Commission said. It had forecast 2020 growth of 1.3 percent in November.

Italy's GDP contracted 0.1 percent in the third quarter and 0.2 percent in the last three months of 2018, putting the euro zone's third biggest economy in a technical recession for the first time in five years.

"While the initial slowdown was largely due to less dynamic world trade, the recent slackening of economic activity is more attributable to sluggish domestic demand, particularly investment, as uncertainty related to the government's policy stance and rising financing costs took its toll," the Commission said.

Italy's borrowing costs surged in the second half of 2018 as investors grew worried that the populist government in Rome would sharply increase spending without additional sources of revenue even though Italy already has the second highest public debt in Europe at 132 percent of GDP.

"What Italy needs is deep structural reforms and decisive action to bring down high levels of public debt, in other words, responsible policies that support stability, confidence and investment," Commission Vice President Valdis Dombrovskis said.

The Commission forecast Italian quarterly growth would be zero in the first three months of 2019, rising to just 0.1 percent in the second quarter against the previous three months.

"The ongoing weakening in the manufacturing sector with a further decline in economic sentiment bodes ill for the near-term outlook. Economic activity is likely to remain anaemic in the first half of 2019," the Commission said.

Rome's weak economic performance raises questions over the country's ability to deliver on the planned budget deficit target of 2.04 percent of GDP this year -- a hard won compromise agreed with the Commission last year.

The Commission had wanted to put Italy into an EU disciplinary procedure, which could mean fines, over Rome's plan to increase the budget deficit to 2.4 percent of GDP in 2019 through tax cuts and spending on welfare and earlier pensions.

In the end, Italy avoided the disciplinary steps by cutting the deficit target to 2.04 percent, but this was on the assumption that economic growth would be 1.0 percent.

(Reporting By Jan Strupczewski; editing by Philip Blenkinsop)

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