Italy central bank slashes 2019 GDP growth forecast

ROME, Jan 18 (Reuters) - The Italian economy will grow just 0.6 percent this year, the Bank of Italy said on Friday, slashing a projection of 1.0 percent made a month ago due to trade tensions and a weaker investment outlook.

The latest forecasts are bad news for the radical government which took office in June last year and is trying to boost the flagging economy without falling foul of European Union budget rules.

In its quarterly economic bulletin the central bank said activity had slowed more sharply than expected over the second half of last year, which will produce a negative carry-over effect on 2019.

It said gross domestic product, which fell 0.1 percent in the third quarter of 2018, probably contracted again in the fourth quarter, producing what economists define as a “technical recession” of two straight quarters of declining GDP.

National statistics institute ISTAT will release official Q4 data on Jan. 31.

The sharper cyclical slowdown at the end of last year will reduce the statistical carry-over for 2019 by 0.2 points, the bulletin said, accounting for half of its downward revision to this year’s growth forecast.

The other factors behind the revision were “the cutback in firms’ investment plans, as confirmed by recent surveys; and the expected slowdown in global trade,” it said.

The government of the anti-establishment 5-Star Movement and the right-wing League last month forecast growth of 1.0 percent for this year, while presenting an expansionary 2019 budget which increases welfare pay-outs and lowers the retirement age.

For 2020 and 2021 the central bank forecast growth of 0.9 percent and 1.0 percent respectively, close to the government’s projections of 1.1 percent and 1.0 percent.

Turning to the state of Italy’s banks, the bulletin said the ratio of non performing loans (NPLs) to total outstanding loans continued to diminish in the third quarter of last year for lenders under the oversight of European Central Bank.

The ratio declined to 9.4 percent from 9.7 percent in the second quarter for gross NPLs and to 4.5 percent compared to 4.7 percent net of loan loss provisions, it said.

The cost of bank credit remained relatively low, the Bank of Italy said, as the transmission of the higher wholesale funding costs to lending rates was “dampened by banks’ favourable capitalization levels and their very stable funding sources”. (additional reporting by Giulio Piovaccari)