EU cuts Italy 2020 growth to 0.3%, casting doubt on Rome's targets

By Giuseppe Fonte

ROME/BRUSSELS (Reuters) - The European Commission said on Thursday it expects Italy's economy to grow just 0.3% in 2020 following a shock fall in national output late last year, below its previous 0.4% forecast and the 0.6% rate Rome said in September was its target.

"Downside risks to the growth outlook remain pronounced," the European Union's executive said, estimating 2021 growth of 0.6% in its new interim forecast.

Italy's economy -- the euro zone's third largest -- unexpectedly contracted by 0.3% between October and December, the steepest quarterly fall since 2013, and Brussels estimated "a slow start into 2020" on the basis of recent business surveys.

Industrial output was much weaker than expected in December, falling 2.7% from the month before, ISTAT data showed this month.

"Real disposable incomes are forecast to rise only moderately, as households are likely to feel repercussions from the softening of the labour market, while precautionary savings are expected to remain high," the Commission said.

Economy Minister Roberto Gualtieri said the sharp decline in Italy's economy at the end of last year was a source of concern for the 5-1/2-month-old government, but added that all economic indicators showed a recovery in January.

"I'm expecting a rebound of economic activity in January and I'm confident that the situation can pick up again," Gualtieri told broadcaster La7 before the EU released its report.

Italy has targeted a 2020 deficit of 2.2% in terms of national output, based on economic growth of 0.6%, an assumption some major forecasters consider far-fetched.

Rome will update its budget and growth forecasts in April.

Brussels said the coronavirus outbreak that emerged in China at the end of last year added "key" downside risks to global growth projections but that it was unable at this stage to assess its impact on the European economy.

The economy ministry said the fallout from the epidemic was a risk factor that would impact the Italian economy "for at least 2-3 months".

Rome is readying measures expected to have "an immediate and significant impact on the economy", the economy ministry said in a statement, promising "increased investment spending and steps to support the confidence of families and investors".

Bank of Italy Governor Ignazio Visco said on Saturday the virus could have a temporary negative effect on growth of "a few tenths" of a percentage point and that "a more significant impact cannot be ruled out".

Credit rating agency Moody's confirmed its 0.5% 2020 growth estimate for Italy, saying it did not see any reason for change at this stage.

(Additional reporting by Giselda Vagnoni and Gavin Jones in Rome, Sara Rossi in Milan; Editing by James Mackenzie and Catherine Evans)