Italy admitted on Wednesday its hopes for a sustained recovery from recession had been too high and called for a joint European solution to stubbornly low growth, as new data compounded the economic problems of Prime Minister Matteo Renzi. Economy Minister Pier Carlo Padoan said Italy must cut its official growth forecasts and called for a "European vision" for reforms. The Italian economy fell back into recession in the second quarter.
At the same time, data showed that consumer confidence fell in August for a third month running, to its lowest since March. Italians expect unemployment, already close to record levels, to continue to rise. "We must cut our GDP growth forecast," Padoan said in an interview with the newspaper Corriere della Sera. "The current situation is worse than expected and no one is happy with it, but it calls attention to the fact that we need joint action." Fiscal consolidation must be "growth-friendly," he said.
Italy has been one of the world's most sluggish economies for the past two decades. Output has contracted for the last two years and is lower now, in inflation-adjusted terms, than it was in 2000, shortly after the euro was introduced. Renzi, 39, who took office in February, has repeatedly called for Italy to be permitted to reduce its huge public debt more slowly than EU rules allow.
Italy currently holds the rotating 6-month presidency of the EU and is trying to promote a more growth-friendly agenda for the region. It wants to shift from the austerity policies introduced in the financial crisis of 2008. Italy's economy shrank by 0.2 percent in the second quarter, while the euro zone as a whole stagnated, fuelling fears that a weak recovery has already petered out.
Padoan did not say what Italy's new forecast will be. Most analysts now expect the country to record little or no growth this year, compared with the 0.8 percent the government projected in April. The new outlook will be issued on October 1. Italy's public debt is around 133 percent of GDP, the second highest in the euro zone after Greece, and continues to rise as the economy falters. Plans to sell state assets to raise cash have stalled.
Wrangling over flexibility versus austerity has infused national politics throughout the region. It split the French government this week and led to a reshuffle shortly before France's own budget negotiations. Both Renzi and Padoan have repeatedly said Italy's budget deficit will remain below the European Union limit of 3 percent of GDP this year, a promise Padoan reiterated on Wednesday.
Renzi, who is due to announce a package of measures on Friday aimed at resuscitating the economy, tweeted early on Wednesday morning: "Italy restarts" and "Bye bye holidays". Arguably his biggest achievement so far is an 80-euro tax cut for lower earners, but that has not been enough to sustain a rise in consumer morale that marked his first months in office.
According to the survey from national statistics bureau ISTAT on Wednesday, Italians' ability to make large purchases dropped to an eight-month low in August, suggesting that the tax cut may not strengthen consumer demand as Renzi had hoped. Renzi has faced criticism for focusing less on urgent economic measures than on long-term institutional reforms, such as changing the electoral law and abolishing the upper parliamentary house as an elected chamber.