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Italy’s Recession Is Worse Than Expected, Central Bank Says

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Jan. 18 (Bloomberg) -- Italy’s recession will be worse than previously expected, the country’s central bank said today as it cut its 2013 estimate for gross domestic product on weakness in the global economy and disappointing internal demand.

Italian GDP will probably contract 1 percent this year, the Bank of Italy said today in its economic bulletin. That compares with a July estimate from the central bank for a 0.2 percent reduction.

“In our country, internal demand still hasn’t reached an inflection point,” the Bank of Italy said. The lower GDP forecast was “due to the worsening of the international scenario and the continuation of the weakness in business activity in recent months.”

Italians are mired in their fourth recession since 2001 as they prepare to vote next month in parliamentary elections. The tax increases and budget cuts imposed by Prime Minister Mario Monti’s caretaker government have pushed joblessness to 11.1 percent, the highest in more than 13 years. Household confidence was near a record low last month.

The Italian government’s budget deficit was probably about 3 percent of GDP last year, excluding real estate disposals and loans to the euro-region’s bailout fund the European Financial Stability Facility, the central bank said. The country’s debt will start to decline in 2014, the Bank of Italy said.

“It is indispensable that the government consolidates the rebalancing of the budget and intensifies reform efforts to boost competition and increase the potential growth of the economy,” the central bank said.

The Bank of Italy, headed by Governor Ignazio Visco, said the country’s lenders were strengthened by European Union initiatives last year to boost liquidity. Still, troubled loans “increased significantly” and prompted banks to maintain curbs on business lending, the central bank said.

“The biggest downside risks are tied to internal-demand and credit-condition trends,” the central bank said. “The return to growth could be delayed by a less favorable evolution of corporate expectations. The deterioration of banks’ balance sheets and the heightened riskiness of their clients could have more persistent effects.”

To contact the reporter on this story: Andrew Frye in Milan at afrye@bloomberg.net.

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

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