Italy cuts growth outlook, expects surge in deficit, debt

ROME: Italy on Thursday cut its economic growth forecast for this year and said the budget deficit would surge to a 20-year high as the coronavirus crisis weighs on recovery prospects and pushes up government spending.

The Treasury's annual Economic and Financial Document (DEF)forecasts gross domestic product will rise in 2021 by 4.5%, down from a 6% projection made last autumn. The fiscal gap is targeted at 11.8% of GDP, up from a previous goal of 8.8% which was updated in January.

The new forecasts were approved by Prime Minister Mario Draghi's two-month old cabinet and will form the preliminary framework for the 2022 budget to be presented in September.

The public debt, proportionally the highest in the euro zone after Greece, stood at a record 155.6% of GDP at the end of 2020 and is forecast in the DEF to climb to 159.8% this year, the highest level in Italy's post-war history.

The euro zone's third largest economy shrank by 8.9% last year as Italy locked down to counter the first wave of COVID-19. The deficit surged to 9.5% of GDP from just 1.6% in 2019.

Italy has not posted a double-digit deficit since the early 1990s.

STIMULUS PACKAGE

The 11.8% shortfall pencilled in for this year incorporates the impact of a new 40 billion euro ($47.87 billion) stimulus package which the cabinet also approved on Thursday.

This will be used to fund additional grants to businesses forced to close due to COVID restrictions and extend an existing debt moratorium for small and medium-sized companies, government sources told Reuters.

Italy's deficit is now around the peaks posted by several European countries in the years following the 2008-2009 global financial crisis.

Italy has been in semi-lockdown for most of this year, with curbs on movement, many services closed including gyms and cinemas, and restaurants only allowed to provide takeaways.

With new infections trending gradually downwards, some parties in Draghi's national unity government are pushing for him to ease the curbs, but around 400 people are still dying from COVID every day.

The government forecast economic growth of 4.8% next year, when it also expects the deficit to fall sharply to 5.9% of GDP and public debt to decline to 156.3%.

The deficit will return below the 3% ceiling in the European Union's Stability Pact in 2025, under the Treasury's projection. The Stability Pact is currently suspended to allow countries to deal with the impact of the pandemic.