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Italy's economy is forecast to shrink by 1.4 percent this year and grow by 0.7 percent next year while unemployment will rise to a record high of 12.3 percent in 2014, figures from the national statistics agency ISTAT showed on Monday.
The 2013 forecast is sharply down on the 0.5 percent contraction of gross domestic product (GDP) which the agency had forecast last November.
ISTAT said that the change was the result of a reduction in domestic demand, only partially offset by external demand. Import growth was also expected to remain negative.
It also blamed "tight credit conditions and persistent negative economic sentiment".
It added: "Private consumption is expected to fall further, reflecting a decline in households' purchasing power and rising unemployment."
The government is predicting a 1.3-percent contraction in 2013 and 1.3 percent expansion in 2014.
The forecast return to growth in 2014 was based on the projection that private consumption will boost output growth while investments grow.
"This outlook in based on the assumption of mild positive effects on 2014 private investment growth of recent measures approved by parliament to accelerate budget arrears repayments to the private sector," ISTAT said.
The agency also forecast that the jobless rate would rise from 11.9 percent in 2013 to 12.3 percent in 2014.