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By James Mackenzie
ROME, July 18 The Bank of Italy on Friday cut its estimate for 2014 growth to just 0.2 percent and warned that there was significant uncertainty about the outlook for the euro zone's third-largest economy.
In its latest quarterly bulletin, the central bank said it expected gross domestic product in the second quarter to be "approximately stationary" after it contracted by 0.1 percent in the first three months of the year.
"However there remain considerable elements of fragility in the outlook for recovery, in part due to the uncertainty over geopolitical tensions and their transmission to international trade," it said.
The central bank had previously forecast 0.7 percent growth for 2014 but it said recent economic data had pointed to a weakening in activity in the last few months.
However it said growth should strengthen next year and could reach 1.3 percent in 2015.
The new forecast brings the central bank roughly into line with statistics agency ISTAT, which recently cut its forecast to a range between a decline of 0.1 percent and a rise of 0.3 percent after a contraction of 1.9 percent in 2013 and 2.4 percent in 2012.
Both are well below the official forecast of 0.8 percent growth which underpinned the government's budget plans for the current year, although Economy Minister Pier Carlo Padoan warned on Thursday that the environment had become more difficult.
Prime Minister Matteo Renzi has pledged sweeping reforms to restore growth to Italy's sickly economy, which the Bank of Italy said had shrunk by around 9 percent since the start of the global financial crisis in 2007.
However, apart from an 80 euro-a-month tax cut for low-income workers passed earlier this year, his government has yet to put in place any of the measures promised.
The central bank said its forecasts assumed "the full and coherent implementation" of measures to strengthen consumer confidence and investment in Italy and recovery in the eurozone as a whole.
It cautioned that international tensions affecting emerging economies and financial markets should not be underestimated.
The Bank of Italy said it expected inflation to average 0.4 percent in 2014 and 0.8 percent in 2015, well below the European Central Bank's target of close to 2 percent. (Editing by Jeremy Gaunt)