Italy slashes 2008 growth forecast

Italy's caretaker government yesterday slashed its economic growth forecast for this year and hiked its target for the budget deficit, underscoring the tough inheritance for whoever wins next month's general election.

A document issued by the economy ministry said the eurozone's third largest economy would grow just 0.6 per cent in 2008, down from the 1.5 per cent it had forecast last autumn.

"The Italian economy will be hit this year by the significant worsening of the international macroeconomic situation and the high degree of uncertainty surrounding the global scenario," it said.

Employers' confederation Confindustria replied with a still gloomier assessment, saying in a statement the economy "is heading towards zero growth in 2008," weighed down by high oil prices and the strong euro, which hit a record high above $1.55 yesterday.

The official revision confirmed a Reuters report on February 28 which quoted a government source saying growth would be cut to between 0.6 per cent and 0.8 per cent.

Data since then showed last year's growth in 2007 came in below expected at 1.5 per cent, little more than half the eurozone average of 2.7 per cent and maintaining a trend which has seen Italy grow less than its partners for at least a decade. The 2009 growth forecast was cut to 1.2 per cent from 1.6 per cent.

The government raised the 2008 budget deficit target to 2.4 per cent of gross domestic product (GDP) from 2.2 per cent, blaming the deteriorating economic outlook.

The new target will mean the deficit will rise significantly from last year's level of 1.9 per cent.

That is likely to displease the European Commission, which recommends that countries running deficits reduce them steadily by around 0.5 points per year towards a balanced budget.

Italy can point to the negative impact on public finances of the downturn in growth and the fact the 2007 deficit was well below an original target of 2.4 per cent.

The economy ministry said after making adjustments for the business cycle and the fact some spending items had been delayed to 2008 from 2007, the deficit would be stable this year.

Economy Minister Tommaso Padoa-Schioppa said the new growth and deficit forecasts were "prudent" and may be improved upon. Recent Italian data has been weak and a growing number of analysts are forecasting growth of 0.5 per cent or below.