ROME, Nov. 30 (Xinhua) -- Italy's fragile economic recovery is showing its strongest signs yet of faltering, throwing new doubt on the government's ability to keep its deficit within acceptable limits over the next year.
In the latest development, Italy's National Statistics Institute, ISTAT, revealed Friday that the country's beleaguered economy contracted in the third quarter of the year, the first time it failed to show any growth in fiscal quarter in more than four years. ISTAT said lower-than-expected domestic demand was to blame for the 0.1-percent drop in the size of the country's gross domestic product(GDP) for the July-to-September period.
The change puts the economy on pace to grow just 0.7 percent this year, compared to previous estimates of 0.8 percent. Earlier in the year estimates were that the economy could grow twice that rate, raising hopes for a mild recovery after ten years of slow growth.
The news from ISTAT comes on the heels of a research report from U.S.-based banking giant Morgan Stanley, which estimated the country's economy will grow just 0.5 percent in 2019.
That is significantly weaker than other estimates for Italian economic prospects next year, which include predicted growth of 1.2 percent from the European Commission, 1.1 percent from ISTAT, 1.0 percent from the International Monetary Fund and 0.9 percent from the Organization for Economic Cooperation and Development.
The trouble for the Italian government is that the government's budget draft for next year is based on estimates that the economy will grow 1.5 percent next year -- higher than the estimates from any major multilateral group or financial institution.
"There was a time when the consensus was for the economy to grow 1.4 or 1.5 percent next year but these figures are continually adjusted and nobody thinks that now," Antonio Esposito, a consultant and retired ISTAT economist, told Xinhua.
Italy has been locked in a battle with the European Commission, the executive branch of the European Union, for six weeks over the size of the country's deficit next year. Italy's original 2019 draft budget plan included a deficit equivalent to 2.4 percent of the country's GDP -- three times larger than the plan of the previous government.
Commissioners repeatedly refused to allow the 2.4 percent figure, and this week Italy gave signals it could produce a budget plan with a deficit of 2.2 percent of GDP. The situation remains unresolved, as the clock ticks toward the final deadline for a formal budget submission.
But according to Alessandro Missale, a political economist with the State University of Milan, slower growth means that if everything goes according to plans the actual deficit will most likely end up totaling 2.8 or 2.9 percent of GDP.
"If growth in Italy is one percentage point lower than in an estimate, that means the country will take in around 18 billion euros (20.4 billion U.S. dollars) less tax revenue," Missale said in an interview. Even if deficit remains steady in absolute terms it would be larger as a percentage of GDP if the economy grows less than forecast.
Though important, reduced tax revenue is not the biggest problem, Missale said. Economic worries and political instability have been driving yields on government bonds higher over the course of 2018. Higher bond yields, which reflect investor jitters, mean the government must pay more money to borrow money, while eroding personal savings among individuals and reducing profits for banks, making them less likely to loan money.
That is a point Morgan Stanley made in its research, estimating one government policy -- plans to provide a minimum basic income for Italians -- would on its own make the economy nearly 0.4 percent smaller next year.
"With its standoff against the commission, the government is hurting itself by increasing its spending and making it harder for the economy to grow," Missale said.
