The International Monetary Fund has lowered its growth forecast for Italy over the next two years and indicated that Rome will not meet its pledge to reduce the deficit to 3% by the end of 2007.
In its latest World Economic Outlook, issued on Wednesday, the IMF predicted that Italy's GDP will rise this year by 1.2% and in 2007 by 1.4%.
In its September forecast, the IMF said GDP would climb by 1.4% in 2006 and 1.7% next year.
In regards to the budget deficit, the IMF said it would be 4% of GDP this year and then rise to 4.3% in 2007.
The outgoing government of Premier Silvio Berlusconi said earlier this month that GDP would go up by 1.3% in 2006 while the deficit would fall to 3.8%, from 4.2% in 2005. Italy has promised the European Union that it will bring its deficit back under the euro zone limit of 3% by the end of 2007, through structural measures aimed at cutting the deficit by at least 0.8% in 2006.
Two months ago the European Commission reduced its GDP growth forecast for Italy from 1.5% to 1.3%.
The EC forecast of 1.3% was the same as those made by the association of Italian industrial employers Confindustria and
the Italian ISAE economic think-tank. The most recent forecast from the Organisation for Economic Cooperation and Development (OECD) put Italy's GDP growth in 2006 at 1.1%.
In the IMF spring report, Italy's massive public debt, the third-largest in the world after the United States and Japan, was forecast to rise from 106.3% of GDP in 2005 to 106.9% this year and then jump to 107.6% in 2007. In presenting the section on Italy, IMF chief economist Raghuram Rajan observed that because of its high deficit and debt "Italy is facing tremendous challenges" and corrective measures were "urgent".
"It is my hope that the new government will understand how serious the situation is. We will wait and see," he added.
Berlusconi's conservative government suffered a narrow defeat in this month's election. Former premier and ex-EC president Romano Prodi is now set to form a center-left executive.
According to the IMF economist, what Italy needs are "structural and macroeconomic reforms in such areas as, for example, financial services". Rajan a recent Financial Times prediction that Italy would be forced to abandon the euro as "pure speculation". "I believe and I hope that there is no chance of Italy leaving the euro," he added.
Looking at the euro zone as a whole, the IMF outlook predicted that the European economy would expand by 2% in 2006 and 1.9% the following year. This compared to a 4.9% increase for the global economy in 2006 and 4.7% rise in 2007. China will see the biggest GDP increase this year and next, 9.5% and 9% respectively, followed by India with 7.3% and 7%.
