September 25, 2014 / 4:17 PM / 5 years ago

Italy to cut 2014, 2015 GDP forecasts, hike deficit goals - source

* Italy to cut 2014 GDP forecast to -0.2 or -0.3 pct

* To raise 2014 deficit-to-GDP target to 2.8 pct

* Negotiating to with EU to delay structural balanced budget

* New forecasts due to be published on Oct. 1

By Giuseppe Fonte

ROME, Sept 25 (Reuters) - Italy is preparing to slash its economic outlook for this year and 2015 and raise its targets for the budget deficit, a government source told Reuters on Thursday.

A Treasury document to be published next week will forecast that the economy will contract by 0.2 percent or 0.3 percent this year, compared with the current official forecast made in April for it to expand 0.8 percent, the source said.

The budget deficit target will be raised to 2.8 of gross domestic product from 2.6 percent, remaining at the same level as last year and inside the European Union’s 3 percent ceiling, the source said.

The government’s new targets reflect disappointing data in the first half of this year, when the economy unexpectedly contracted in both the first and second quarters, plunging Italy back into recession.

The Organisation for Economic Cooperation and Development and Italian employers’ association Confindustria both forecast the euro zone’s third largest economy will contract by 0.4 percent this year.

The Treasury’s revisions to its outlook for 2015 will be much steeper, with expected GDP growth slashed to around 0.5 percent from 1.3 percent.

The budget deficit will be targeted to remain at 2.8 percent, a full percentage point higher than the current forecast of 1.8 percent.

In line with the relaxation of its fiscal stance, the government hopes to delay its commitment to achieve a balanced budget in structural terms - adjusted for the business cycle and one-off factors - to 2016 from 2015, the source said.

However, this delay is still subject to negotiation with the European Commission and it is not yet sure that it will feature in the update to the Economic and Financial Document due to be published on Oct 1, he said.

Matteo Renzi’s coalition government got some welcome breathing space for public finances this week when national statistics bureau ISTAT revised up the level of GDP due to mothodological changes.

That led to a cut in the 2013 deficit-to-GDP ratio to 2.8 percent from 3.0 percent and is likely to also help this year’s fiscal accounts. (writing by Gavin Jones)

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