By Isla Binnie

By Isla Binnie


ROME (Reuters) - Prime Minister Matteo Renzi seized on Italy's return to modest economic growth on Tuesday to promote his reform agenda ahead of a constitutional referendum upon which he has staked his political future.


The Italian economy rebounded slightly more strongly than expected in the third quarter after stagnating in April-June - welcome news for Renzi, who opinion polls suggest will lose the Dec. 4 vote.


"With reforms, GDP rises," Renzi wrote on Twitter. "Full steam ahead."


Gross domestic product in the euro zone's third-largest economy rose 0.3 percent in July-September from the previous quarter, statistics institute ISTAT said on Tuesday. Year-on-year growth accelerated to 0.9 percent from a downwardly revised 0.7 percent in the second quarter.

A Reuters survey of 18 analysts had pointed to a 0.2 percent quarterly increase and a 0.8 percent year-on-year rise.

But as Italians get ready to vote on Renzi's plan to reduce the role of the Senate - parliament's upper house - and curb the powers of regional governments, plenty of risks to the economic outlook persist.

"We remain wary that the country is still struggling to develop a more sustainable and broad-based upturn," Raj Badiani, senior economist at IHS Global Insight, said in a note.

Among the biggest concerns is a lack of lending to firms by banks struggling with bad debts of more than 200 billion euros ($214.9 billion) that built up during a slump at the start of the decade.

The risks are also political. "Renzi has threatened to step down if he loses ... throwing Italy into political turmoil at a time when economic pressures are acute," Badiani said.


Investors are zeroing in on Italy ahead of the referendum, and government bond yields spiked to their highest levels in over a year on Monday after Renzi reiterated that he may step down if his reform is rejected.

The yields investors demand to hold Italian debt shrank back on Tuesday after the forecast-beating GDP data.

With one of the world's largest public debt piles, Italy's borrowing costs are closely watched as a potential flashpoint for market instability in the wider euro zone.

Many Italians feel that Renzi, who came to power in 2014 vowing to "demolish" old political structures and breathe life into a moribund economy, has not delivered on his promises.

"He seemed like something new, but he has betrayed some of that spirit," said Pietro Manetta, a 50 year-old lawyer who lives in Rome and plans to vote 'No' in the referendum.

Promised reforms to the sclerotic public administration, justice system and taxation have not yet brought tangible benefits to people's pockets, and youth unemployment has stayed close to 40 percent despite a 2014 labor market reform.

"The real problem is what people take home at the end of the month ... To get the whole economy going we need to simplify everything," Manetta said.

"This constitutional reform does not solve the problem."

(Additional reporting by Gavin Jones; Editing by Catherine Evans)