By Valentina Za
MILAN (Reuters) - Italy will cut its economic growth estimates, the economy minister said on Tuesday, making Prime Minister Matteo Renzi's promise to cut taxes and reduce public debt look even harder to achieve.
"Growth will be revised down in forecasts the government is about to release as background to the budget law," Economy Minister Pier Carlo Padoan said at a Euromoney conference.
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The euro zone's third-largest economy stagnated in the second quarter and national statistics bureau ISTAT said it would remain weak in the near term.
Padoan did not say what the new forecast would be, but a government source said it would probably be cut to 0.8-0.9 percent for this year, down from 1.2 percent forecast in April.
The government must publish its official, updated forecasts by Sept. 27. Most analysts expect no more than 1 percent growth this year and an even weaker reading the following year.
Output is now expected to rise 1.0-1.1 percent in 2017, compared with a previous 1.4 percent forecast, the source said.
Italy's economy continues to underperform the wider euro zone, for which the European Central Bank this month raised its 2016 growth forecast to 1.7 percent from 1.6 percent.
The ECB trimmed next year's forecast to 1.6 percent from 1.7 percent. That would still be at least double the growth expected for Italy, dragged down for years by low productivity, low employment rates and stifling bureaucracy.
Unlike Spain and Portugal, Italy is managing to keep its annual deficit to GDP ratio within the European Union's 3 percent limit, but it has failed to reduce the gap by as much as it promised Brussels.
The new forecasts will probably raise the projected size of the deficit relative to output this year by a notch to 2.4 percent versus the previous 2.3 percent target, the government source said.
"TOO FAR FROM THE AVERAGE"
Italian employers confederation Confindustria forecasts growth of just 0.6 percent in 2017. Several large banks have even lower projections, with Barclays Capital forecasting a contraction of 0.1 percent.
Germany's DIW institute said last week that the euro zone's largest economy would expand by 1.9 percent this year but slow to 1.0 percent in 2017 when the impact of Britain's decision to exit the EU would be more strongly felt.
Tommaso Nannicini, Renzi's economics adviser, told Reuters on Monday: "Aside from the numbers in themselves, what worries me is that we are too far away from the euro zone average."
Padoan said there would be no room to cut income tax in the 2017 budget to be presented next month, although the government would maintain tax breaks already in place for companies that invest in new equipment.
"Growth is not what we would like," Renzi admitted in Milan at the opening of new offices of the German multinational engineering company Siemens on Tuesday.
Industrial output data offered some relief on Tuesday, rising by 0.4 percent in July from the month before, after two consecutive declines.
But the weaker growth outlook makes it harder for Rome to cut its huge public debt, the highest in the euro zone after Greece as a percentage of national output.
The Bank of Italy has warned that the government may not manage to meet its pledge that the debt, which stood at around 133 percent of GDP in 2015, will fall this year for the first time in eight years.
(Additional reporting by Luca Trogni, Francesca Piscioneri and Giuseppe Fonte; Writing by Gavin Jones and Isla Binnie; Editing by Robin Pomeroy and Catherine Evans)