November 27, 2012 / 10:00 AM / 5 years ago

OECD cuts Italy GDP outlook, hikes deficit

* Cuts Italy 2013 GDP forecast to -1.0 pct from -0.4 pct

* Hikes 2013 deficit/GDP forecast to 2.9 pct from 0.6 pct

* Warns next government not to back off Monti’s reform path

PARIS, Nov 27 (Reuters) - Italy’s economy will shrink more than the government projects next year and the fiscal deficit will be far above target, the OECD said on Tuesday, underscoring the problems facing whoever wins March’s national election.

The Paris-based Organisation for Economic Co-operation and Development forecast the euro zone’s third-largest economy will shrink by 1 percent in 2013, cutting its previous forecast of a 0.4 percent contraction made in May.

Mario Monti’s technocrat government forecasts a marginal decline of just 0.2 percent and the OECD said the deeper recession would take a heavy toll on the prime minister’s efforts to consolidate public finances.

Italy has been in recession since mid-2011, weighed down by tax hikes which have stifled demand, and the OECD said gross domestic product (GDP) would shrink 2.2 percent this year, more than its May forecast for a 1.7 percent GDP fall.

Monti’s fiscal tightening has hit growth but failed to cut the budget gap as planned.

This year’s deficit will come in at 3 percent of GDP, the OECD said, compared with Monti’s 2.6 percent target, which he revised up from 1.7 percent just two months ago.

“Fiscal consolidation of nearly 3 percent of GDP this year weakened domestic demand and private consumption has been falling at the steepest rate since the Second World War,” the report said.

In the next two years the gap between the report’s projections and Monti’s widen further, with the OECD seeing a deficit of 2.9 percent in 2013 and 3.4 percent in 2014, compared with the government’s goals of 1.8 percent and 1.5 percent.

“Should the OECD projection be realised, further fiscal tightening in 2014 would be necessary to achieve the planned debt reduction path,” the report said.

Rome wants its debt burden, the second largest in the euro zone after Greece‘s, to fall to 119.9 percent of GDP in 2015 from a targeted 126.4 percent this year.

Despite the difficult outlook, the OECD praised Monti’s efforts since he took office a year ago when Italy risked a Greek-style debt crisis and said his reforms, notably of the labour market, should eventually help lift the economy out of a decade of stagnation.

It said the government that succeeds Monti’s must “maintain the course” on structural reforms and fiscal consolidation.

“Backing off either would damage market sentiment and growth,” it warned.

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