–GDP Forecasts Cut for 2012 (-1.4% vs +0.1%) and 2013 (+0.4% vs +0.7%)

FRANKFURT (MNI) – The Italian economy will start to recover from
recession at the end of this year and register very weak growth every
quarter of next year, the EU Commission predicted Friday.

The Commission’s updated forecasts for the Eurozone’s third-largest
economy presented a stark contrast with regard to the current year to
its forecasts issued last Autumn.

Whereas the Commission had then expected GDP in 2012 to rise a
marginal 0.1%, it now sees a 1.4% drop. The revision to the 2013
prediction was relatively slight but also to the downside (+0.4% vs
+0.7%).

“Under the assumption of no further worsening in financial market
conditions and yields on 10-year Italian sovereign bonds slightly below
6%, output is expected to stabilise in the third quarter of 2012 and to
start expanding only mildly as of the last quarter of 2012,” it
explained.

The Commission attributed the weak performance expected this year
to a sharp fall in domestic demand, beleaguered by a feeble labor market
and stringent fiscal belt-tightening. Next year would bring a marginal
decline of 0.1% after -2.9% this year.

This result would reflect continued weakness in particular in
construction investment. On the positive side, “firms are expected to
resume their investment plans already in the second half of the year, on
the back of recovering foreign demand and gradually easing financing
conditions,” according to the Commission.

Looking at fiscal developments, the Commission projected that
Italy’s general government deficit would decline further this year to
2.0% of GDP as the primary surplus improves to 3.4% on the back of
measures taken the last two years.

“By contrast, interest expenditure is projected to rise further –
to 5.4% of GDP – due to higher refinancing rates,” it said. “In
structural terms, the annual adjustment is projected to be around 3 pps
of GDP for the overall balance and 3.5 pps for the primary balance.”

The Commission painted a yet more favorable picture of fiscal
developments in Italy next year, citing “additional consolidation
effects” from the 2010-2011 measures.

These would yield an additional rise in the primary surplus to 4.5%
of GDP and a decline in the headline deficit to 1.1% of GDP, it said.

“Interest expenditure is projected to continue to rise, albeit at a
slower pace,” the Commission continued. “A balanced budgetary position
is expected to be achieved in structural terms thanks to the additional
adjustment of more than 0.5 pp of GDP. The structural primary surplus is
set to increase by around 1 pp and reach 5.5% of GDP.”

On the inflation front, the Commission said core HICP (ex-energy
and unprocessed foods) would exceed 3% in 4Q 2012 and then commence a
descent to 1.5% by end-2013, “under the assumption of no second-round
effects on wages from the increase in inflation due to higher indirect
taxation.”

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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