Italian economy to shrink by more than previously thought

The International Monetary Fund (IMF) expects Italy’s economy to contract more than previously thought, cutting its GDP forecast from -1.5 per cent to -1.8 per cent.

This comes as the country’s public deficit to GDP ratio falls to 7.3 per cent on flat revenues and growing expenditure. Earlier today, La Stampa reported that the IMF was preparing a loan of between €400m and €600m for the country in the case of its debt case worsening, which could give prime minister Mario Monti 12 to 18 months to implement his reforms without having to refinance existing debt. The interest rate on the loan would be between four and six per cent.

However, the IMF also raised its 2014 outlook from a growth of 0.5 per cent to 0.7 per cent. "The recovery is expected to start in late 2013, supported by exports and a modest turnaround in investment led in part by the clearance of public arrears," they said.

The IMF recommends a number of reforms. In particular, priority should be given to raising employment, especially among women and the young, with the IMF estimating that closing half of the employment gap with the rest of Europe (around four and a half percentage points) could lift GDP by two and a half per cent by GDP.

The full report can be seen here.