ROME Italy's economic growth is set to slow this year more than previously expected while fiscal deficits are likely to miss the government targets, according to a Reuters poll which underlines concern about efforts to cut Italy's huge debt burden.
Italian markets were pounded over the past week as investors drove up government borrowing costs and dumped Italian banking shares on concerns the country was being drawn into the euro zone debt crisis. Slower economic growth will make the government's task of slashing public debt even harder.
The median forecast in a quarterly survey of around 20 analysts points to an annual rise of just 0.9 percent in gross domestic product in 2011 for the euro zone's third-biggest economy. That would be down from a forecast of 1.1 percent in a similar survey in April and easing after a 1.2 percent expansion in 2010.
Growth in 2012 was seen at 1.1 percent, slightly below the 1.2 percent reading in the last survey. The forecasts are lower than the government's forecasts of 1.1 percent growth this year and 1.3 percent growth in 2012.
Economists predict weaker exports in the fourth quarter of 2011 and continuing slack domestic demand, highlighting the problems facing the Italian government, which is under pressure from ratings agencies to stimulate chronically sluggish growth.
"Exporters have helped to dig Italy out of recession, but face an uphill battle to maintain their recent impressive performance," said Raj Badiani of IHS Global Insight.
"A key concern is the flurry of austerity measures being implemented across the euro zone at a time when the recovery remains vulnerable in several member countries," he said.
Financial markets have calmed slightly following a violent selloff that sent Italian bond yields soaring to record levels this week. However, investors remain extremely nervous about the prospect of Italy being sucked into the financial crisis and the Italian treasury had to offer record high interest rates to sell 15-year debt on Thursday.
While a full-scale crisis whereby Italy would require a Greek-style bailout from the European Union and International Monetary Fund in the next six months to a year is generally considered only a remote possibility, the economy as a whole remains a concern.
DEFICITS SEEN OVER TARGET
Weak PMI surveys in June and a fall in May industrial output reported earlier this month have underlined fears that growth in the second half may stall, undermining the government's target of restoring the budget to balance by 2014.
Median forecasts for the deficit this year pointed to a reading of 4.0 percent of gross domestic product in 2011, slightly above the government's target of 3.9 percent and 3.3 percent in 2012, above the official 2.7 percent target.
That will hamper government efforts to cut Italy's mountainous public debt -- second only to Greece's in the euro zone -- which the survey forecast would rise from 120.2 percent of GDP in 2011 to 120.6 percent in 2012.
Prime Minister Silvio Berlusconi's center-right government has announced a four-year, 40 billion-euro austerity package, including measures to cut funding to local government and health services and delay retirement.
The package is expected to be approved in parliament by Friday but Italy's weak growth, one of the prime factors holding up efforts to cut the debt, could outweigh any benefit from the budget measures.
Fears over the sustainability of the debt shook financial markets this week, sending yields on Italian 10-year bonds above 6 percent and widening spreads over benchmark German bonds to 330 basis points.
Ratings agencies Standard and Poor's and Moody's have both warned they may cut Italy's credit rating if the government does not get the stalled economy moving but there has been little sign of the kind of reform which might change market sentiment.
(Editing by Susan Fenton)