BERLIN (MNI) – The International Monetary Fund forecast on Tuesday
that Italy’s economy will decline by 1.9% this year and by another 0.3%
next year.

“The economy is expected to continue contracting through the year
owing to tight financial conditions, the global slowdown, and the needed
fiscal consolidation,” the IMF said in its so-called Article IV staff
report.

“Absent shocks, the recovery will take hold in early 2013, led by a
modest pickup in exports, but will lag the rest of the region,” the fund
predicted.

“The risks to the outlook are however on the downside, stemming
mainly from an intensification of the euro area crisis,” the IMF
cautioned.

Over the medium term, low trend productivity and an aging society
are likely to constrain Italy’s growth prospects, the report said. “The
steady loss in competitiveness over the past decade, if remained
unaddressed, will remain a drag on growth,” the fund said.

It stressed the importance for Italy of maintaining its current
momentum for reforms: “To revive growth, priority should be given to
raising productivity and labor participation, pursuing growth-friendly
fiscal consolidation, and promoting a more dynamic and resilient banking
system.”

Inflation will ease only gradually over the forecasting period, as
the impact of weak demand is partly offset by higher indirect taxes, the
report assessed. It projected consumer prices to rise by 3.0% this year
and by 2.1% next year.

On the fiscal side, the IMF welcomed the government’s increased
focus on targeting a structural balance to ensure flexibility in fiscal
policy. The fund encouraged the government to rebalance the adjustment
towards expenditure cuts and lower taxes. “The recently announced
package of spending cuts is a step in the right direction,” it remarked.

The report noted that there is still scope for cutting the public
sector wage bill, reducing tax expenditures, and stepping up efforts
against tax evasion. It also pointed to the need to pursue more
comprehensive privatization.

The IMF forecast that the country’s public deficit will fall from
3.9% of GDP last year to 2.6% this year and 1.5% next year. Public debt
is seen rising from 120.1% of GDP in 2011 to 125.8% in 2012 and to
126.4% in 2013.

The financial turmoil has put Italian banks under stress, the
report noted. Still, banks have made progress in strengthening their
capital positions and raising private capital to meet the targets set
by the European Banking Authority (EBA), the fund said.

“Banks need to maintain adequate capital and liquidity buffers to
remain resilient to the downturn,” the report stated. Reducing impaired
loans would free up resources for new lending and strengthen banks’
balance sheets, the IMF said.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com

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