Italy slashes 2023 growth forecast but sees public finances improving

By Giuseppe Fonte and Gavin Jones

ROME (Reuters) - Mario Draghi's outgoing Italian government on Wednesday slashed next year's economic growth forecast to 0.6% due to sky-high energy costs but said strong revenues would still ensure an improvement in public finances.

Gross domestic product in the euro zone's third largest economy will "decline slightly" over the second half of this year, a government statement said.

The new growth projections underscore the economic headwinds facing Giorgia Meloni, who led a right-wing alliance to victory at elections on Sunday and is expected to be named prime minister next month.

The Treasury's annual Economic and Financial Document (DEF) said GDP would expand 3.3% in 2022, up from a 3.1% forecast set in April, thanks to buoyant growth over the first six months.

The 0.6% forecast for next year signals a dramatic worsening in the outlook compared with the previous goal of 2.4%.

Draghi has already earmarked some 66 billion euros ($64 billion) since January to try to soften the energy crisis exacerbated by Ukraine war. His successor will probably have to move along the same path.

Now serving in a caretaker capacity, Draghi penciled in the forecasts under an unchanged policy scenario.

Meloni may set new targets shortly after taking office if she believes her promised tax cuts and spending measures can stimulate the economy.

DEFICIT, DEBT TO FALL

Despite the weakening growth outlook, record-high inflation is helping to bring down Italy's huge public debt as a proportion of nominal GDP. At the same time, the surge in oil and gas prices is boosting revenues from value added tax and excise duties.

The DEF sees the budget deficit at 5.1% of GDP in 2022, sharply down from a previous target of 5.6%, while the forecast for 2023 is cut to 3.4% from 3.9%.

This gives Meloni room for expansionary measures worth around 0.5% of GDP this year and next without raising the deficit levels above the previous targets.

The forecasting document sees the fiscal gap declining very gradually to 3.2% in 2025, still above the European Union's 3% ceiling which has been temporarily suspended to help the bloc's economies recover from the impact of the COVID-19 pandemic.

Italy's public debt, proportionally the second highest in the euro zone after Greece's, is seen at 145.4% of GDP this year, down from a previous forecast of 147.0%.

It is targeted to decline to 143.2% in 2023.

Inflation, measured using the consumption deflator, is seen averaging 6.6% this year and 4.5% in 2023.

The DEF also said that Italy had so far managed to spend around 21 billion euros of European Union pandemic recovery funds.

That leaves a further 170 billion still to be invested through 2026, provided Rome can meet the policy "targets and milestones" agreed with Brussels as a condition for disbursing the money.

($1 = 1.0314 euros)

(Editing by Toby Chopra)