A vendor sells souvenirs at Trevi Fountain in Rome, Italy, August 29, 2019.
A vendor sells souvenirs at Trevi Fountain in Rome, Italy, August 29, 2019. Reuters / CIRO DE LUCA

Italy has slashed its growth estimate for this year as the war in Ukraine weighs on the economy, while confirming a previous budget deficit target of 5.6% of national output, according to a draft government document seen by Reuters.

The Treasury's annual Economic and Financial Document (DEF)forecasts gross domestic product in the euro zone's third largest economy will grow by 3.1%, down from a 4.7% projection made last September, the draft shows.

For 2023, the government sees GDP growth of 2.4%, down from the previous target of 2.8%.

The economy probably contracted in the first quarter, the draft of the DEF showed. It is expected to recover in the second quarter, the document says, while acknowledging growing difficulties connected with events in Ukraine.

"Economic prospects, conditioned in the last two years by the (COVID) pandemic, are now marked by uncertainty regarding the conflict between Russia and Ukraine and the consequent increase in raw material prices and financial market fluctuations," the draft said.

A lasting war "would have strong repercussions on inflation as well as on economic growth", it said.

In a worst-case scenario assuming serious shortages in gas supplies for Italy and other European countries, the Treasury estimates growth of just 0.6% in 2022 and 0.4% next year.

The new targets are set to be approved by the cabinet later on Wednesday and will form the preliminary framework for the 2023 budget.

The public debt, proportionally the highest in the euro zone after Greece's, is targeted in the DEF at 147% of GDP this year, down from a previous 149.4%, and is set to decline to 145.2% in 2023, the draft showed.

In confirming the 5.6% deficit goal this year, Prime Minister Mario Draghi is helped by the fact the fiscal gap is on course for 5.1% under an unchanged policy scenario.

This allows potential leeway worth 9.5 billion euros ($10.38 billion) of additional spending or tax cuts.

However, 4.5 billion euros will go to finance schemes to cap energy prices approved earlier this year that were only temporarily funded, leaving 5 billion euros available for the government to spend this year without hiking the 5.6% target.

Rome plans to use these resources in April to keep capping energy costs, extend financing for existing guarantee schemes on bank loans and help Ukrainian refugees, the document said.

The fiscal gap is seen at 3.9% of GDP in 2023, unchanged from the previous target.

($1 = 0.9156 euros)