In the fourth quarter of 2018, the Italian economy contracted owing to a slowdown in exports, plunging it into a technical recession (PHILIPPE HUGUEN)

Milan (AFP) – Italy’s populist government on Tuesday defiantly raised its 2019 budget deficit forecast to 2.4 percent of GDP, incurring the risk of a new row with the EU over fiscal discipline.

The figure restores a forecast issued last year that was deemed unacceptable by European Union officials.

Rome and Brussels sparred over the budget numbers, and had agreed that Italy would strive for a deficit of 2.04 percent instead.

The bump back to 2.4 percent came as Italy slashed its 2019 economic growth forecast to 0.2 percent from a prior estimate of 1.0 percent, highlighting a gloomy overall eurozone outlook. 

The ruling coalition of the anti-establishment Five Star Movement (M5S) and anti-immigrant League party nonetheless pledged to respect “targets set by the European Commission,” a statement issued by the Italian presidency said.

The Italian economy, the eurozone’s third largest, has been identified as a weak link along with that of normally strong Germany.

While the new growth number did not come as a complete surprise, it underscored that the 19-nation bloc was likely to struggle to make headway this year.

The International Monetary Fund sharply lowered its growth outlook for the eurozone on Tuesday, saying that gross domestic product (GDP) in the bloc should increase by just 1.3 percent this year, after a rise of 1.8 percent in 2018.

The restored budget deficit forecast could now trigger another round of wrangling, and possibly provoke pressure from financial markets.

Without the compromise reached last year, Italy could have ultimately faced a fine of up to 0.2 percent of the nation’s GDP after a long and rancorous process with its eurozone partners.

In the meantime however, Italian Economy Minister Giovanni Tria warned in late March that Italy was headed for zero economic growth this year. 

And the European Commission had already pencilled in growth of just 0.2 percent for Italy, while the IMF’s estimate on Tuesday was 0.1 percent.

Italy’s public debt now sits at 2.3 trillion euros ($2.6 trillion), or 131 percent of Italy’s GDP — way above the 60 percent EU ceiling, though much of it is held domestically which reduces pressure on the government. 

In the fourth quarter of 2018, the Italian economy contracted owing to a slowdown in exports, plunging it into a technical recession.

Populist policies by Italy’s government have affected business investment meanwhile, while consumer confidence has slumped as well.

Disclaimer: Validity of the above story is for 7 Days from original date of publishing. Source: AFP.