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Categorized | Economy

Italy downgrades economic forecasts

Posted on September 28, 2016

The Italian national flag flies above Piazza Venezia in Rome, Italy, on Wednesday, May 26, 2010. Prime Minister Silvio Berlusconi said Italy's planned 24.9 billion euros ($30.4 billion) of budget cuts over the next two years are "absolutely necessary" to defend the euro and protect Italy. Photographer: Victor Sokolowicz/Bloomberg©Bloomberg

Italy has downgraded its economic forecasts, presenting the country with a worse fiscal outlook than expected and limiting prime minister Matteo Renzi’s chances of proposing a big economic stimulus before the December referendum that will determine his fate. 

The Italian cabinet approved the new projections overnight, slashing its estimate for gross domestic product growth this year to 0.8 per cent from a pace of 1.2 per cent predicted in April. Next year, Rome is expecting growth of 1 per cent, compared with a previous estimate of 1.4 per cent. 

    Pier Carlo Padoan, Italy’s finance minister, suggested a darkening global picture was primarily to blame. “Not only is the international environment unfavourable but it is worsening, both in terms of slower growth perspectives globally and in Europe, but also because the euro has appreciated this year, instead of losing value, which has been another brake on the European economy,” Mr Padoan said at a press conference on Wednesday. 

    The economic downgrade — including lower inflation than hoped — has hit Italy’s fiscal outlook, preventing Rome from meeting its goal of reducing its debt-to-GDP ratio for the first time in eight years. Instead, Italy’s indebtedness, which is one of the main sources of its economic weakness, will remain around the same level as last year, or 132.8 per cent of GDP, with a reduction coming only in 2017. 

    Italy’s deficit to GDP ratio for this year will remain steady at 2.4 per cent and Rome is planning to keep it at that level in 2017 as well. Originally, it was expected to drop to 1.8 per cent but Rome is now targeting 2 per cent plus further spending worth 0.4 percentage points of GDP, which will need approval from the EU, for “extraordinary” measures to tackle earthquake reconstruction in central Italy and the migrant crisis.

    “Europe is seriously in debt with Italy when it comes to immigration,” Mr Renzi said at the same press conference. 

    The more challenging fiscal picture has further complicated Mr Renzi’s hopes of proposing an expansionary budget in mid-October to help bolster consensus for his government ahead of the high-stakes December 4 referendum on constitutional reform. Mr Renzi has threatened to resign if he loses, which could plunge the eurozone’s third-largest economy into a new period of protracted political instability. 

    Can Matteo Renzi pull off Italy’s constitutional shake-up?

    Italian prime minister Matteo Renzi

    Prime minister stakes his premiership on a referendum

    “Renzi clearly thinks the budget is his last chance to win the referendum, especially given where the poll numbers currently lie, but it’s not going to be easy,” says Mujtaba Rahman, a policy analyst at the Eurasia Group in London. “There’s not much policy space left to fudge the EU budget rules,” he added.

    Mr Renzi has at the very least guaranteed that he will be able to avoid any tax rises, but has had to rule out bringing forward a cut in personal income taxes from 2018 to 2017, which he had floated in May. However, he is still planning to cut corporate tax next year, implement targeted measures to boost investment, allow for early retirement in some cases and boost pensions for lower-income citizens. 

    “Renzi pushed as far as he could, and then he negotiated [with Brussels] and realised that more than this would be almost impossible, otherwise Italy would have faced problems,” says Lorenzo Codogno, a former Italian treasury official and founder of LC Macro Advisers.

    Senior EU officials have been discussing the forthcoming budget with Italian officials for weeks but will not take a public position until after it is published. Though there have been clashes between Rome and Brussels over the budget in recent years, the EU has ultimately declined to punish Italy for failing to meet some of its fiscal targets. At a Politico event in Brussels this week, Pierre Moscovici, the EU commissioner for economic and financial affairs, said of Italy’s fiscal plan: “There is no political decision, of course; there is no budget for now. But we are having a dialogue with a positive spirit.”