February 10, 2020 / 5:19 PM / 12 days ago

UPDATE 2-Think tanks cut Italy 2020 forecasts after dive in GDP, industry output

* Parliamentary budget watchdog cuts growth forecast

* Italy’s economy contracted between October and December

* Industrial output much weaker than expected in December (Re-leads, adds think-tank, govt statement, background)

By Giuseppe Fonte and Gavin Jones

ROME, Feb 10 (Reuters) - Economists are cutting their forecasts for Italian economic growth following shock falls in gross domestic product and industrial output at the end of last year.

The parliamentary budget watchdog (UPB) said on Monday it expects GDP to grow just 0.2% in 2020, far below its previous 0.5% forecast and the 0.6% rate officially targeted by the government in September.

Italy’s economy - the euro zone’s third largest - unexpectedly contracted by 0.3% between October and December, following a 0.1% rise in the third quarter, national statistics bureau ISTAT reported last month.

“In the current quarter GDP will not recover the sharp decline of the previous period,” UPB said in a statement. It is the first major forecaster to cut its 2020 outlook after the fourth quarter GDP drop.

Industrial output was much weaker than expected in December, falling 2.7% from the month before to post its steepest decline for almost two years, ISTAT reported on Monday.

Lorenzo Codogno, a former chief economist at the Italian Treasury and now head of London-based think tank LC Macro Advisors, was even more downbeat than UPB, forecasting the economy would contract this year by 0.1%.

In a note to clients, he revised down his previous forecast of 0.3% growth due to “global trade weakness disproportionately affecting Italian industry, a longer lasting depressed inventory cycle, a much lower basis for the whole year set by Q4 2019, and the still-to-come effect of the coronavirus.”

Codogno said GDP would shrink by 0.1% in the current quarter, putting the economy in its fourth recession since the global financial crisis. Economists define a recession as two consecutive quarters of falling GDP.

Bank of Italy Governor Ignazio Visco said on Saturday that measures to counter the spread of the new coronavirus that first emerged in China could also have a significant impact on the Italian economy, adding downside risks to growth projections.

Visco said the virus could have a temporary negative effect on growth of “a few tenths” of a percentage point, but “a more significant impact cannot be ruled out.”

The government of the anti-establishment 5-Star Movement and the centre-left Democratic Party said in a statement that it was working on measures to limit the impact of the coronavirus on the economy. It did not provide details.

Prometeia think tank forecast that industrial output would rebound by 2.1% in January and would be flat in the first quarter as a whole from the previous three months. (Editing by Kirsten Donovan and Timothy Heritage)

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