Bank of Italy sees gloom deepening for economy

ROME (Reuters) – Italy’s central bank cut its forecast for the country’s shrinking economy on Friday, as tight credit conditions and a gloomy international backdrop darken the domestic outlook before a national election in February.

The Bank of Italy said it now expects gross domestic product (GDP) to fall by one per cent this year rather than the 0.2 per cent contraction it forecast in July.

It also warned the budget deficit might not have fallen below three per cent of output last year, which would stop Italy from exiting the EU’s excessive deficit procedure, despite austerity measures imposed by technocrat Mario Monti’s government.

In a quarterly economic report that highlighted the economic challenges that will face Monti’s successor, the bank said the recession that started in the third quarter of 2011 would extend well into 2013, with unemployment continuing to climb and reaching 12 per cent by 2014 from 8.4 per cent in 2011.

Later on Friday a government official said fresh corrective measures may be needed to meet fiscal targets for this year, unless Italy’s partners are flexible in allowing a deficit overshoot.

The central bank’s report will be unwelcome reading for Monti, who is bidding for a second term in the Feb 24-25 vote but whose centrist alliance lags Pier Luigi Bersani’s centre-left and the centre-right led by former Prime Minister Silvio Berlusconi.

Since his appointment in November 2011, Monti has had to repeatedly cut his growth forecasts and raise his deficit and debt targets as economic conditions have weakened.