By Gavin Jones and Giuseppe Fonte

ROME (Reuters) -Italy’s economy performed unexpectedly well in the third quarter, data showed on Monday, offering a welcome boost for the country’s new government as it plans extra borrowing to help families and firms cope with surging inflation.

Gross domestic product grew by 0.5% in the third quarter from the second and 2.6% year on year, national statistics bureau ISTAT said.

Both preliminary readings were around half a percentage point higher than expected in Reuters survey of analysts, while the Treasury had said last month it expected a third quarter contraction.

Resilience in the service sector shored up domestic demand, ISTAT said.

Industry contracted and trade flows were a drag on growth, however, and the outlook is clouded by sky-high, energy-driven inflation exacerbated by the war in Ukraine, which has sapped business and consumer confidence, crimped investments and hit families’ spending power.

In his first speech since taking office this month as economy minister in Giorgia Meloni’s nationalist administration, Giancarlo Giorgetti said on Monday the government would cut the budget deficit and huge public debt over coming years, but promised more spending in the near term.

The government plans to raise next year’s budget deficit to 4.5% of GDP, up from the 3.4% projected last month under current trends, a senior official said. This would give Meloni room for expansionary measures worth almost 21 billion euros ($20.8 billion).

Italy will issue new economic and public finance targets at it next cabinet meeting which will probably be on Nov. 4, Meloni told reporters on Monday.

RECESSION COMING?

Giorgetti, from the right-wing League party, noted that Germany and France had already announced “large-scale measures” of economic support to tackle the energy and inflation crises, and said Italy must not be afraid to do the same.

“We are profoundly convinced of the need to protect families, especially the weakest, from the rise in energy bills and the cost of living,” he told a banking conference in Rome.

Meloni took office promising tax cuts and higher pensions at the head of a coalition government formed following national elections on Sept. 25.

GDP in the euro zone’s third largest economy has exceeded expectations in each of the first three quarters of this year, but Unicredit economist Loredana Federico said her bank still expected recession around the turn of the year, with Italy “particularly vulnerable to Europe’s energy crisis.”

Italian inflation hit 12.8% in October, the highest level since the country’s EU-harmonised index was launched in 1996.

Federico said a successful summer for the tourist sector had probably boosted growth between July and September in a country where around 13% of GDP is linked to tourism, and forecast a 0.5% GDP fall in the fourth quarter.

Full year growth this year will come in at 3.7%, Federico forecast, above Rome’s official 3.3% target.

($1 = 1.0112 euros)

(Editing by John Stonestreet)