EU cuts Italy GDP outlook, crimping room for Meloni's budget promises

3/3 © Reuters. FILE PHOTO: European flags fly outside the European Commission headquarters in Brussels, Belgium March 13, 2023. REUTERS/Yves Herman/File Photo 2/3

By Giuseppe Fonte

ROME (Reuters) - The European Commission on Monday cut its forecasts for the Italian economy this year and next, following a slew of weak data which limits Prime Minister Giorgia Meloni's scope to enact promised tax cuts in the 2024 budget.

Brussels said the country's GDP was expected to grow by 0.9% this year and 0.8% in 2024, marking a downward revision of 0.3 percentage points for each year.

The government in Rome, which is due to update a raft of economic projections by Sept. 27, forecast in April GDP growth of 1% this year and 1.5% in 2024.

While the Treasury has said Italy can still achieve the 2023 target, the latest indicators suggest next year's goal is out of reach.

After a strong pick-up in the first quarter of 2023, Italy's GDP shrank by 0.4% in the second quarter and its services and manufacturing sectors contracted in August, raising the risk of weak economic activity extending into the third quarter.

"The phasing out of the extraordinary and temporary incentives for building improvements decided during the COVID-pandemic, which pushed construction activity up sharply in the past two years, contributed to this development," the European Commission said.

Investment activity is set to contract in the remainder of 2023 and then pick up moderately in 2024, the EU said, adding that net exports are projected to provide smaller support to growth in 2024.

Inflation measured by the EU-harmonised HICP index is projected to moderate to 5.9% in 2023 and 2.9% in 2024, it said.

Lower-than-expected growth reduces tax revenues and makes it more difficult to meet budget deficit targets. In Italy's case, these have already been compromised by a ruling from EU statistics agency Eurostat over how home incentives should be classified in state accounts.

Sources told Reuters last week that Italy was preparing to raise its 2023 budget deficit-to-GDP ratio above the goal of 4.5% of GDP set in April, while also working on measures to prevent or limit further deviations from the 3.7% goal targeted next year.

Despite a darkening outlook, Italy has reiterated its commitment to keeping the deficit on a downward trend, leaving little leeway for stimulus.

Among her top priorities, Meloni intends to earmark more than 9 billion euros ($9.65 billion) to extend to 2024 the tax cuts that have helped middle and low-income workers cope with high consumer prices this year.

($1 = 0.9324 euros)