(Corrects paragraph 3 to show recession began in third quarter
2011, not first quarter)
* Central bank slashes 2013 GDP view to -1.0 pct from -0.2
* Expects only 0.7 pct economic growth in 2014
* Report highlights economic challenges facing next
ROME, Jan 18 The Bank of Italy slashed its
forecast for the country's shrinking economy on Friday, as tight
credit conditions and a gloomy international backdrop darken the
domestic outlook ahead of national elections in February.
The central bank said it now expects gross domestic product
to slump by 1.0 percent this year rather than the 0.2 percent
contraction it forecast in July.
In a quarterly economic report that highlighted the economic
challenges that will face Italy's next government, the bank said
the recession that started in the third quarter of 2011 would
extend well into 2013.
It forecast only a modest and uncertain revival in the
second half of this year and growth of just 0.7 percent in 2014,
adding that the economy probably contracted by 2.1 percent in
Prime Minister Mario Monti, appointed at the height of the
financial crisis in 2011 to prevent Italy's huge public debt
from sliding out of control, has been widely credited with
restoring international credibility.
But he has overseen a severe economic recession exacerbated
by the tough austerity measures he has imposed, leaving a huge
challenge for the government that will succeed his technocrat
administration following the Feb. 24-25 ballot.
Underlining the damage done to the euro zone's third largest
economy since the start of the crisis, the Bank of Italy said
that even after the forecast return to growth in 2014 gross
domestic product would still be left almost 7 percentage points
below the level of 2007.
The report estimated Italy's public deficit fell to around 3
percent of gross domestic product in 2012, from 3.9 percent in
It gave no precise deficit estimate for the current year,
when the government has forecast a balanced budget in
structural, or growth-adjusted terms, but said that budget
measures undertaken in 2011 would "allow an improvement in the
balance of public finance in the 2013-2014 period."
It said the debt-to-GDP ratio, which the government
estimates will reach 126.1 percent in 2013, would start to come
down in 2014, thanks to an improvement in the primary surplus -
which excludes debt servicing costs - and a return to economic
The bank's new forecasts are significantly more pessimistic
than government forecasts from October, which see the economy
contracting by 0.2 percent in 2013 before returning to growth of
1.1 percent in 2014.
The report said that whichever government came to power
after the elections would have to continue rebalancing public
finances and pursuing reforms to restore Italy's economic
(Reporting by James Mackenzie; Editing by John Stonestreet)