Italy's growth seen at 0.6 percent this year, lower than government forecasts - Reuters poll

By Viviana Venturi and Steve Scherer

ROME (Reuters) - Italy's economy will hobble back to growth this year, but it will expand less than Prime Minister Matteo Renzi's government has forecast, a Reuters poll showed.

The consensus of 20 economists polled in the past week predicts gross domestic product (GDP) will rise 0.6 percent in 2014, lower than the government's 0.8 percent target but higher than the 0.4 percent forecast in a January poll.

Growth is expected to accelerate to 1.0 percent in 2015.

Italy's economy, the euro zone's third-biggest, shrank in 2012 and 2013, and returned to growth on a quarterly basis for the first time in more than two years during the final three months of last year.

The budget deficit is expected to hit 2.9 percent of GDP by the end of this year, just below the European Union ceiling of 3 percent of GDP, but above the government's 2.6 percent forecast.

The 39-year-old Renzi, who took power from party rival Enrico Letta in February, has announced income tax cuts for low earners in a bid to revive the economy, where per capita real income is at its lowest level since 1997.

Last week he said the tax cuts, which will cost the state 10 billion euros (8.2 billion pounds) a year, would be paid for mainly by spending reductions, but Renzi also said he is pushing for greater EU leeway on budget rules.

Starting in May, the tax cuts will put about 80 euros a month on average in the pockets of about 10 million taxpayers, Renzi has said.

"We see better growth this year and above all in 2015 on the back of the tax cuts," said Giada Giani, an economist at Citi in London. "Low earners have the highest propensity to spend the tax savings."

She raised her growth forecasts by 30 basis points for this year and next, to 0.6 and 0.9 percent respectively, after Renzi announced the cuts. The state's planned repayment of debt owed to private companies will also help growth, she said.

While Italy's economy is growing again, the unemployment rate continues to edge up, hitting 12.9 percent in January, the highest since records began in 1977.

The jobless rate will continue to rise, to average 13 percent in the third quarter of the year before edging down, according to the poll.

Debt will increase this year to more than 135 percent of GDP from 132.6 percent in 2013, the poll forecast, slightly higher than the government's target of 134.9 percent.

The deficit will fall to 2.5 percent of GDP next year and 1.9 percent in 2016, according to the poll, compared with government forecasts of 1.8 percent and 0.9 percent.

Inflation in Italy is seen averaging 0.7 percent this year, and will stay well below the European Central Bank's 2.0 percent inflation target ceiling through 2016.

(Editing by Susan Fenton)