Italy growth slowing as prices, deficit rise

By Gavin Jones

ROME (Reuters) - Italy's economic growth outlook has weakened further as inflation rises and the budget deficit widens, according to a Reuters poll released on Wednesday.

The mid-range forecast in the quarterly survey of 20 economists points to a 0.4 percent increase in gross domestic product this year, down from 1.5 percent in 2007 and a 0.6 percent 2008 forecast in the last survey in April.

"Gross domestic product weakness is becoming increasingly broad based," said UniCredit analyst Marco Valli. "Manufacturing and services surveys continue to drift lower, and business confidence has fallen to the same level reached during the last technical recession (Q4 2004/Q1 2005)."

The euro zone's third largest economy has been one of its most sluggish performers for more than a decade and is now suffering more than most of its partners from surging oil prices, a strong currency and the international slowdown.

Italian growth is seen falling further behind the euro zone average, which is forecast at 1.6 percent this year, and will recover only modestly to 0.8 percent in 2009, according to the survey.

The Bank of Italy is more downbeat, forecasting growth of 0.4 percent in both years. Treasury Chief Economist Lorenzo Codogno said the economy stagnated between April and June after the 0.5 percent quarterly expansion in the first quarter.

Inflation, which has risen steadily on high energy and food prices to a record high of 3.8 percent in June according to the national CPI measure, will average 3.5 percent this year, the poll projected, up from 3.0 percent in the April survey.

The outlook for public finances has worsened slightly over the last three months alongside the weakening economy, and the 2009 budget deficit is seen overshooting the target set in the centre-right government's budget presented last month.

The 2008 deficit is seen at 2.5 percent of GDP, inching up from 2.4 percent forecast in April and well above last year's 1.9 percent which was inside the European Union's 3 percent ceiling for the first time since 2002.

The budget gap is forecast to be broadly stable next year at 2.4 percent, compared with a government target of 2.0 percent.

After winning April's election with a tax cutting agenda, media tycoon Silvio Berlusconi was widely criticized when he announced last month that taxes as a proportion of gross domestic product would remain stable for the next five years.

"With growth that has slowed to zero and the deficit on the rise there is no money for anyone, not even the government," Economy Minister Giulio Tremonti said. "We can't share out a cake that doesn't exist."

Italy's enormous debt, the largest in the euro zone and the third largest in the world, is seen edging down to 103.5 percent of GDP from 104 percent last year.

The long-running fall in joblessness, helped by more flexible labor market rules, has reversed since the end of last year as the economy has stalled.

The average unemployment rate is seen rising to 6.6 percent in 2008, up sharply from 6.1 percent last year and a 6.1 percent forecast in the April survey.