Renzi Forced to Cut Growth Forecasts Ahead of Key Referendum

Updated on
  • Government says it failed to lower debt-to-GDP ratio this year
  • Italy may need EU green light for more public spending

The Italian government cut its growth forecast for this year and next while failing to meet a debt-load reduction goal in a setback for Prime Minister Matteo Renzi, as he faces a referendum on constitutional reform that could cost him his job.

“The dynamic is still unsatisfactory even if it is going in the right direction," Finance Minister Pier Carlo Padoan said at a press conference in Rome late on Tuesday, after ministers passed an update to economic forecasts ahead of next year’s budget law. “The debt-to-GDP ratio doesn’t go down, I admit it, I had imagined it would go down.”

Renzi faces the difficult task of maintaining the budget discipline required by the European Commission while restarting an economic recovery that came to a halt in the second quarter. He will also be put to the test in a Dec. 4 referendum on reform of the Senate which aims to make governments more stable. Renzi promised to resign if he loses the vote, although he has refused to be drawn on the matter in recent interviews.

The Treasury now sees gross domestic product expanding 0.8 percent this year, compared with an increase of 1.2 percent predicted in April. It also targets slower-than-expected growth next year, with GDP rising 1 percent compared with a previous estimate of 1.2 percent. Public debt is seen rising to 132.8 percent of GDP this year and falling to 132.2 percent in 2017, after the government previously predicted a decline in the debt load for both years.

The government targets a budget deficit of 2 percent of GDP next year, down from 2.4 percent this year, according to figures released after the cabinet meeting. The prime minister said he will request budget flexibility for the August earthquake in central Italy and costs linked to handling migration flows under European Union rules.

Debt Load

Both Renzi and Padoan have repeatedly staked the government’s credibility on the debt-load reduction in 2016. To obtain it, they had been counting on the sale of state-owned assets worth as much as 0.5 percent of GDP or approximately 8 billion euros ($9 billion).

“The privatization program, which I underline goes ahead, has been slowed because of significant volatility on markets” which led us “to wait for better times,” Padoan said. “We are not with a knife to our throat.”

So far in 2016, the Treasury received 834 million euros from the sale of a stake in the state-run air traffic controller Enav SpA. The time for the planned sale of a further stake in Poste Italiane SpA after the company’s initial public offering in 2015 hasn’t been set yet, while the partial privatization of the railroad company Ferrovie dello Stato SpA has been postponed. It may take place next year, Ferrovie’s Chairwoman Gioia Ghezzi told reporters in Rome on Wednesday.

Italy’s debt, the second-biggest in the euro region as a percentage of GDP, reached a record high of 2.25 trillion euros in July. It rose by 145 billion euros since Renzi became premier in February 2014.

’Triple Witching’

“You have the banking issues, you have the economic growth which is not very strong and then you have the referendum,” Lorenzo Codogno, a former chief economist at the country’s Treasury Department, said in a Bloomberg television interview on Tuesday. “So it’s kind of a triple witching hour for Italy, and if something goes wrong, indeed it could be a problem. But again I tend to believe that at least for now the situation should not be particularly worrying.”

Italian consumer confidence fell to the lowest since July 2015 this month as manufacturing confidence rose, statistics agency Istat said in Rome on Wednesday.