Moody's has cut its 2014 growth forecast for Italy and now expects the economy to contract by 0.1 percent this year, adding to pressure on Prime Minister Matteo Renzi to deliver on promised far-reaching reforms. The US rating agency, which had previously expected the Italian economy to grow by 0.5 percent in 2014, slashed its estimate after last week's news that Italy unexpectedly slipped back into recession in the second quarter.
In a note published on Monday, Moody's said the data showed a uniform weakness in the euro zone's third biggest economy, adding that the deteriorating outlook would have a negative impact on fiscal policy and the overall political climate. "The contraction of the economy threatens the government's fiscal strength," it said.
Moody's forecast a budget deficit at 2.7 percent of gross domestic product (GDP) this year and next, "with significant risk of further upward revisions". In an interview with the Financial Times published on Monday, Renzi said Italy would post a budget deficit of 2.9 percent of GDP without the need for more fiscal tightening, maintaining that Rome will not breach the European Union's 3 percent ceiling. Italy's current deficit forecast for 2014, issued in April, is 2.6 percent. But the target, as well as the official growth estimate of 0.8 percent, is expected to be revised when the government presents its new financial planning document in September.
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