Italy Boosts Deficit Forecast as Recession Worse Than Expected

Italian Prime Minister Mario Monti’s government increased its budget-deficit forecast after underestimating the severity of the recession.

Government spending will probably exceed revenue by 2.6 percent of gross domestic product this year, Monti’s office said today after a cabinet meeting in Rome. That compares with the government’s April forecast of 1.7 percent. Italy’s GDP will probably fall 2.4 percent this year, the government said, twice the April forecast.

Monti aggravated Italy’s fourth recession since 2001 by imposing an austerity budget of tax increases and spending cuts to help shield Italy from Europe’s sovereign debt crisis. The plan, which won the approval of the European Union, took money out of the pockets of consumers and investors. Tax receipts are missing forecasts and Italy is at risk of breaching the EU’s deficit limit of 3 percent this year, said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt.

“The economic outlook was never favorable for Italy, but it has certainly worsened over the last few months,” Rondorf said. “I would even be skeptical that they reach the 3 percent mark. That would be a real hurdle.”

The government’s 2012 GDP revision means Monti’s government is forecasting a deeper contraction than the 2.2 percent rate expected by economists, according to the average estimate in a survey by Bloomberg.

Contraction in 2013

The Italian economy will probably contract in 2013, shrinking 0.2 percent. In April the government expected growth of 0.5 percent. Debt will reach 126.4 percent of GDP this year including the costs of European bailouts, before peaking at 127.1 percent in 2013. Excluding rescue payments, debt will rise to 123.3 this year and hold at that level in 2013.

Monti, a former university president and European Union commissioner brought to power in November, has turned his attention to stimulating the economy and boosting Italy’s productivity in the home stretch of his 17-month term. He has acknowledged that his austerity budget, which helped lower Italy’s borrowing costs and safeguard the government from a European bailout, has hurt the economy.

“Only a fool could think it’s possible to act on a decades-long Italian structural problem without bringing about a short-term reduction in demand,” Monti said Sept. 11 in a speech to a conference of textile makers in Milan. “We had to decide whether to enact our long-term vision, or to simply ride out the financial storm as best we could.”

To contact the reporter on this story: Andrew Frye in Rome at afrye@bloomberg.net; Chiara Remondini in Milan at cremondini@bloomberg.net.

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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