By Giuseppe Fonte and Gavin Jones
ROME, April 22 (Reuters) – Italy is set to cut its economic growth forecasts on Wednesday due to the turmoil in the Middle East and surging energy costs, government officials said, with the outlook for public finances dependent on a ruling from Eurostat on Rome’s 2025 accounts.
Prime Minister Giorgia Meloni’s government is expected to reduce its estimate for this year’s growth to around 0.5% or 0.6% from a current 0.7% target, and lower next year’s outlook to 0.6% or 0.7% from 0.8%, the sources said.
The euro zone’s third-largest economy rebounded strongly from the COVID-19 pandemic, helped by costly state-funded building incentives, but has since resumed its customary place among the euro zone’s most sluggish performers.
DEBT CLIMBING
Even assuming the government’s forecasts are achieved, Italy will post five consecutive years of sub-1% gross domestic product growth from 2023-2027, despite a constant flow of billions of euros from the EU’s pandemic recovery funds.
The economic weakness is weighing on public finances. The International Monetary Fund forecast last week that Italy will overtake Greece this year to post the euro zone’s highest debt-to-GDP ratio, respectively seen at 138.4% and 136.9%.
The cabinet is expected to meet at 1000 GMT to discuss and approve the Document of Public Finance (DFP), which will update multi-year estimates for the deficit, debt and GDP growth.
These estimates will be projections under un unchanged policy scenario, rather than official targets, which the government says cannot be made due to the intense geopolitical uncertainty triggered by the U.S.-Israeli war against Iran.
Despite the weakening growth outlook, Italy sees the budget deficit at around 2.8% of GDP in 2026 and at around 2.6% in 2027, broadly in line with the targets set last autumn.
EXCESSIVE DEFICIT PROCEDURE
Before the cabinet meets, at 0900 GMT EU statistics agency Eurostat will publish data on member states’ 2025 deficits. Italy has said for weeks that it hoped for a downward revision to 3% from the 3.1% Rome’s statistics bureau ISTAT estimated in March.
However, financial daily Il Sole 24 ore reported on Wednesday that the 3.1% figure would be confirmed.
A 3% deficit, as the government had targeted for 2025, would allow Italy to exit an EU Excessive Deficit Procedure (EDP) this year, provided Brussels is convinced the improvement in its accounts is permanent.
Exiting the EDP would mean that, should the EU decide to ease budget rules at a later stage to help member states cope with the energy crisis, Italy can use the additional leeway without facing new disciplinary steps.
So far, the EU Commission has ruled out activating a so-called ‘general escape clause’ from its budget rules that allowed member states to respond to the COVID-19 pandemic between 2020 and 2023.
In view of this, Italy has signalled it may resort to a ‘national escape clause’ allowing member states to negotiate with Brussels higher deficit targets in response to exceptional external circumstances, or to boost its defence spending.
(Reporting by Giuseppe Fonte and Gavin Jones, editing by Alvise Armellini)
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