ROME (MNI) – The contraction in Italian economic activity should
slow in 2Q and continue to diminish in the second half for a return to
positive growth at the start of next year, the Bank of Italy forecast
Tuesday.

The central bank revised down its projections for GDP this year to
show a drop of 2.0% compared to -1.5% expected in January due mainly to
weak domestic consumption and investment, restricted credit access and
slowing global trade.

After a 0.8% drop in 1Q, GDP probably fell by a little over half a
point in 2Q, with industrial production alone down 1.5% on the quarter,
it estimated.

Activity this year is likely to be “characterized by an accentuated
weakness in domestic demand due to the deterioration in financing
conditions and the impact on disposable incomes of the measures to
consolidate public finances adopted last year,” the central bank
explained.

Surveys show half of domestic firms reporting a deterioration in
investment conditions in 2Q and no signals for a turnaround in the near
term. Prospects for the construction sector are “not favorable,” it
noted.

Credit market tensions should cut around half a point from GDP
this year, while the recent earthquake in the northeastern industrial
region around Bologna could trim another 0.1 point, it estimated.

Growth next year should be “barely positive”, giving an average
annual GDP decline of 0.2%, revised down from flat, the central bank
said in its Economic Bulletin, adding that growth in 2014 could be
more buoyant.

HICP inflation should begin to slow in the second half of this year
from May’s 3.5% annual rate, giving an average annual full-year rate of
3.0% (revised down from 3.1%). The slowdown should continue next year
to dampen the rate to 1.8% (2.4%).

The projections assume that firms’ and households’ difficulties in
accessing credit diminish gradually over the course of this year and
that the credit market begins to return to normal conditions next year,
the central bank said.

The more technical assumptions are a decline in the average oil
price from $106.30 per barrel this year to $97.50 next year. Longer-term
capital market rates would hover around 6% on average this year and
next, and spreads of Italian 10-year bonds to German Bunds would remain
around 450 basis points.

–Paris newsroom, +33142715540; ssandelius@marketnews.com
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