By Gavin Jones
ROME (Reuters) - Italy's growth rebound from the COVID-19 pandemic is petering out much faster than expected as structural weaknesses resurface, raising risks for the fragile public finances of the euro zone's third largest economy.
After gross domestic product unexpectedly stagnated in the third quarter, national statistics bureau ISTAT said this month it expected no near-term recovery and forecast 2024 growth of just 0.5%, half the government's official 1% target.
ISTAT's estimate would return Italy to its customary place among the euro zone's weakest performers and contradict an upbeat picture painted by Prime Minister Giorgia Meloni, as well as some economists, just a few months ago.
Recent data has been grim. Business confidence is at its lowest since 2021, a long-running manufacturing crisis is deepening, and the services sector which had propped up the economy for most of the year is now also contracting.
"Italy's business model made up of small firms is no longer conducive to growth, it has insufficient public investment and it is fighting the green transition instead of embracing it as a growth opportunity," said Francesco Saraceno, economics professor at Paris's Science Po and Rome's LUISS university.
Analysts say the situation is even more worrying considering that Italy is receiving a constant flow of tens of billions of euros from Brussels as part of the European Union's post-COVID Recovery Fund.
Spain, the other main recipient of the fund, is growing at least four times as fast.
SHORT-TERM BOOST
Saraceno said Italy's buoyancy in 2021-2022 was based mainly on state-funded incentives for the building sector - the so-called "superbonus" - which powered an investment surge that has reversed this year as the costly scheme has been phased out.
Italy has been the most sluggish euro zone economy since the launch of the single currency 25 years ago, and its latest slump threatens to derail its public finances that have already been compromised by the superbonus.
The public debt, proportionally the second largest in the euro zone, is forecast by the government to rise to around 138% of GDP in 2026 from 135% last year.
If growth in 2025 comes in significantly below Rome's 1.2% target, as most forecasters now expect, that debt ratio will probably climb faster. Investors may then become more reluctant to buy Italian bonds, increasing the government's heavy debt-servicing burden.
Italy is already under EU orders to slash its budget deficit due to massive overshoots in the last two years, removing any hope of spending its way to growth.