Italy Cuts Growth Outlook, Hikes Deficit, Debt as Iran War Weighs

Italy cuts growth outlook, hikes deficit, debt as Iran war weighs

Italy Revises Economic Forecasts Amid Geopolitical Tensions

By Giuseppe Fonte and Gavin Jones

ROME, April 22 (Reuters) - Italy on Wednesday cut its economic growth outlook and hiked forecasts for the budget deficit and public debt, reflecting surging energy prices and turmoil in the Middle East.

Growth Outlook and Government Projections

The euro zone's third-largest economy is headed for growth of 0.6% both this year and next, Economy Minister Giancarlo Giorgetti told reporters after the cabinet signed off on the government's new budget framework.

The new figures compare with targets of 0.7% and 0.8% respectively which the government set in September.

Impact of Middle East Conflict

"We're not faced by normal circumstances but totally exceptional ones ... there's the war," Giorgetti said, referring to the U.S.-Israeli conflict with Iran.

He added that given current uncertainty surrounding the gross domestic product projections, "unfortunately in coming weeks they will probably need to be reviewed, adjusted and updated."

Post-Pandemic Economic Performance

Italy rebounded strongly from the COVID-19 pandemic, helped by costly state-funded building incentives, but has since resumed its customary place among the euro zone's most sluggish performers.

Looking further ahead, Giorgetti projected a 0.8% rate of economic expansion in 2028, which would mark six consecutive years of sub-1% growth from 2023-2028, despite a constant flow of billions of euros from the EU's pandemic recovery funds.

Debt and Deficit Developments

Debt Climbing

DEBT CLIMBING

The economic weakness is weighing on public finances. The International Monetary Fund forecast last week that Italy will overtake Greece this year to post the euro zone's highest debt-to-GDP ratio, respectively seen at 138.4% and 136.9%.

Giorgetti said the budget deficit is now seen this year at 2.9% of GDP, up from a previous target of 2.8%, and would edge down to 2.8% in 2027, compared with the previous goal of 2.6%.

According to the government's new estimates the public debt will rise this year to 138.6% from 137.1% in 2025, and remain virtually stable at 138.5% in 2027.

ISTAT Data and EU Deficit Procedure

Earlier on Wednesday, national statistics bureau ISTAT confirmed that Italy posted a budget deficit of 3.1% of GDP in 2025, dashing Rome's hopes of exiting an EU disciplinary procedure this year for its "excessive" deficit.

The deficit figure, contained in ISTAT's official notification to the European Commission, is lower than the 3.4% deficit-to-GDP reading in 2024 but just above Rome's target and the European Union's ceiling of 3%.

Italy Remains in EU Deficit Sin Bin

ITALY REMAINS IN EU DEFICIT SIN BIN

An earlier exit from the procedure would have meant that, should the EU decide to ease budget rules to help member states cope with the energy crisis, Italy could have used the additional leeway without facing new disciplinary steps.

Giorgetti pointed out that before lowering its 2025 deficit target to 3% Italy had agreed a 3.3% goal with the European Commission and the deficit was in any case on a downward trend, confirming the country's fiscal prudence.

Potential Policy Responses

He said if the geopolitical turmoil persists Italy could tap a 'national escape clause' allowing member states to negotiate with Brussels higher deficit targets in response to exceptional external circumstances, or to boost its defence spending.

Giorgetti added that the government may approve a windfall tax on energy groups to fund relief measures aimed at helping families and firms pay high energy bills.

"We are facing a world that has presented us with challenges that demand a swift response," he said.

(Editing by Alvise Armellini)