* IMF sees Italy economy shrinking 1.8 pct this year
* Sees weak recovery from end of 2013
* Says recent reforms haven't gone far enough
* Urges direct asset purchases, long-term loans by ECB
(Adds detail, background, quotes)
By Gavin Jones and Stefano Bernabei
ROME, July 4 Italy's recession-bound economy
should begin to recover from the end of this year but its growth
outlook remains weak and Enrico Letta's government must
accelerate its reform efforts, the International Monetary Fund
said on Thursday.
At the end of annual consultations with Italy, the IMF said
the euro zone's third largest economy would contract by 1.8
percent this year, worse than its previous projection of a 1.5
percent fall in output.
Next year will see growth of 0.7 percent, the Fund said in
its concluding statement, up from its previous forecast of 0.5
percent, but it warned that the risks to its outlook are tilted
to the downside and market sentiment remains fragile.
Italy's reform efforts need to be complemented at the
European level, the Fund said, urging direct asset purchases by
the European Central Bank and more long-term cheap loans "of
considerable tenor" to euro zone banks.
Italy is mired in its longest post-war recession, with gross
domestic product shrinking for seven consecutive quarters since
the middle of 2011 and unemployment at a record high above 12
The IMF said it expected the recession to end towards the
end of this year, supported by exports.
Recent data has been mixed, with some signs of revival in
the manufacturing sector but a persistent slump in construction,
retail and services, as domestic demand remains extremely weak.
"Accelerating the momentum for reform will be essential to
jumpstart growth and create jobs," the IMF said.
"Europe will also need to play its part with actions to
address financial fragmentation and strengthen further the
currency union," it added.
Italy has been euro zone's most sluggish economy for more
than a decade. After years of stagnation and recession its gross
domestic product is lower now, in inflation-adjusted terms, than
it was at the end of 2001.
"Italy's growth prospects over the medium term will
strengthen only with the implementation of comprehensive
reforms," the IMF said.
It said reforms adopted by Italy in recent years did not go
far enough and called for greater deregulation of the service
sector and the labour market and reform of a "lengthy and
inefficient" justice system.
It urged a single, more flexible labour contract for new
workers and said Italy should accelerate its stalled
Italian authorities must also closely monitor Banca Monte
dei Paschi di Siena's restructuring plan and be ready
to act if Italy's third-largest lender misses its financial
targets, the Fund said.
(Additional reporting by Giuseppe Fonte; editing by James
Mackenzie and Stephen Nisbet)