Italy’s Economic Recovery Still Faces Headwinds, IMF Review Says

Italian prime Minister Enrico Letta still faces an uphill battle in helping his country exit its longest recession in more than two decades, the International Monetary Fund said.

The euro region’s third-largest economy “is showing signs of stabilizing, but strong headwinds are still holding back the recovery,” the Washington-based lender said today in a report. “Growth prospects remain weak, unemployment is unacceptably high, and market sentiment is still fragile.”

The IMF downgraded its growth outlook for Italy this year, saying gross domestic product will shrink 1.8 percent, compared with its April forecast of 1.5 percent. The economy will expand 0.7 percent in 2014, up from its previous estimate of 0.5 percent.

While austerity measures passed by Letta’s predecessor, Mario Monti, allowed Italy to reduce its deficit to within European Union limits, they also deepened the nation’s slump. With the economy headed for its eighth quarter of contraction and joblessness at its highest since at least 1977, Letta’s cabinet decided last month to postpone a scheduled sales-tax increase and the payment of a property tax.

“Italy’s growth prospects over the medium term will strengthen only with the implementation of comprehensive reforms,” the IMF said. Raising employment and improving productivity and competitiveness are among key issues that need to be addressed, according to the report.

Rule Change

The Brussels-based European Commission gave the country a helping hand yesterday when it further eased euro-zone deficit constraints. Amid longstanding demands from countries including Italy, EC President Jose Barroso said some investments in transport, energy and other types of infrastructure won’t be counted as deficit spending in 2013 and 2014.

The IMF said Italy is set to reach its target of structural balance this year after “achieving one of the highest primary surpluses in the euro area last year.”

Still, any measures by the bearer of Europe’s second-biggest debt load must take into account strict budget constraints. Italy needs to issue a monthly average of 40 billion euros ($51.7 billion) in government securities to finance its debt, Finance Minister Fabrizio Saccomanni told lawmakers in Rome yesterday.

The country needs stronger budget institutions and binding multi-year expenditure ceilings to help enhance credibility, the IMF said.

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