May 6, 2020 / 9:08 AM / 21 days ago

Impact of virus on Italy's economy laid bare in EU forecasts

BRUSSELS (Reuters) - Italy’s public debt will hit almost 160% of GDP this year and its economy shrink by close to a tenth, the EU predicted, highlighting the longer-term impact of coronavirus lockdown measures on the euro zone state worst hit by the epidemic.

FILE PHOTO: General view of empty Saint Mark's Square as the spread of the coronavirus disease (COVID-19) continues, Venice, Italy, April 16, 2020. REUTERS/Manuel Silvestri/File Photo

European Union economics commissioner Paolo Gentiloni praised steps taken by the Italian government to contain the economic fallout from the crisis.

But having been affected earlier and harder by the outbreak than other euro zone countries, “Italy’s recovery is forecast to take longer” than elsewhere in the bloc, he told a news conference.

Italy has recorded more than 29,000 coronavirus-linked deaths, the third highest tally in the world.

The sombre forecasts from Brussels, the first since the start of the pandemic, may put further strain on Italian government debt, which is already being tested by markets despite massive purchases of the country’s bonds by the European Central Bank.

An ultimatum to the ECB over its flagship stimulus programme on Tuesday from Germany’s constitutional court caused a sharp selloff in Italian debt, pushing the 10-year yield up nearly 20 basis points to a week-and-a-half high of 1.947% IT10YT=RR. It was trading at around 1.87% on Wednesday.

The Commission, the EU executive arm, said Italy’s debt was set to jump to 158.9% of GDP - its highest rate since World War II - this year before dropping marginally in 2021. The 134.8% it recorded in 2019 was the second highest in the European Union.

At the end of April, the government in Rome had forecast a rise to 155.7% this year.

The debt increase is due in part to a large fall in Italy’s gross domestic product, which the Commission - using data collated up to April 23 - predicts will drop by 9.5% this year and 18% in the six months to June.

Across the euro zone, it forecast an average GDP fall of 7.7% this year.

As Italy begins to ease one of Europe’s longest and strictest coronavirus lockdowns, the costs of the emergency restrictions become clearer.

The Commission estimated the country’s deficit will jump to 11.1% this year, the highest in the EU and well beyond the bloc’s 3% ceiling that has, however, been suspended during the pandemic to allow necessary extra spending.

All 19 countries of the euro zone will significantly breach the 3% limit this year, the Commission also said.

Brussels predicts a 6.5% rebound in Italy’s GDP in 2021.

Reporting by Francesco Guarascio @fraguarascio, Editing by Gabriela Baczynska and John Stonestreet

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