The Italian government's planned stimulus would leave it “very vulnerable” to adverse shocks and could evolve from a slowdown to a recession, the International Monetary Fund (IMF) warned Tuesday.
Hours before the deadline Rome had to submit a revised 2019 budget draft to the European Commission, the IMF drew a gloomy picture for the economy in its annual review.
The Commission, the European Union’s administrative body, had repeatedly warned Italy to reduce spending before rejecting its initial budget draft, proposing an extra 0.8 percent increase in so-called structural deficit.
The rejected plan would increase the deficit from 1.6 percent to 2.4 percent of the Italy’s gross domestic product -- three times the target of the previous government.
The IMF identified low growth and weak social outcomes as key problems in the Italian economy while pointing to higher unemployment and falling incomes. Even though authorities emphasis on growth and social inclusion is welcome, the IMF advised against planned fiscal stimulus to stir the weakening economy.
The growth effect of the stimulus would be uncertain over the next two years and likely negative over the medium-term, according to IMF.
"The planned stimulus carries substantial downside risks as it would leave Italy very vulnerable," the IMF said, warning materialization of even modest adverse shocks, such as slowing growth or rising spreads, would increase debt, raising the risk Italy could be forced into a large fiscal consolidation when the economy is weakening.
"This could transform a slowdown into a recession" it said.
To raise growth and assist those left behind, the IMF recommends a package of structural reforms, fiscal consolidation based on high-quality measures, and bank balance sheet strengthening instead.
With approximately 130 percent of its GDP, Italy has the second highest public debt in Europe, after Greece.
The ongoing budget crises between the country's populist government and the EU concerns global investors who are already skittish about the consequences of Brexit.