By Antonella Cinelli and Valentina Consiglio

ROME (Reuters) – Italy posted firm economic growth of 3.7% last year but the budget deficit far exceeded official forecasts due to the cost of tax incentives for green buildings, national statistics bureau ISTAT reported on Wednesday.

Growth slowed from 7.0% (upwardly revised from 6.7%) in 2021 but it was in line with the government’s most recent projection, as the euro zone’s third largest economy held up better than expected during the first three quarters.

“Private consumption, fixed investment and exports gave a significant contribution to sustained GDP growth”, said Loredana Federico, chief Italian economist at UniCredit.

The construction sector and several service industries made an increased contribution to economic growth, while the agriculture sector dropped, ISTAT said.

ITALY’S GDP https://fingfx.thomsonreuters.com/gfx/mkt/gdvzqmkoapw/PIL-Istat.jpeg

The picture for public finances was less positive, with the budget deficit overshooting Rome’s target in 2022 due to a recent ruling by the European Union’s statistics agency Eurostat regarding the way tax credits are classified in state accounts.

The deficits for the previous two years were also revised up.

Last year’s fiscal gap was reported at 8.0% of gross domestic product, compared with an official target of 5.6% set in November. The deficits in 2021 and 2020 were revised respectively to 9.0% from 7.2% and to 9.7% from 9.5%.

Italy’s government expects Eurostat’s ruling will have a small impact on its 2023 deficit, after Rome blocked the sale of tax credits stemming from works to improve and “green up” homes, a Treasury official said on Tuesday.

ITALY’S DEFICIT/GDP https://fingfx.thomsonreuters.com/gfx/mkt/zgpobnagdvd/DEFICIT-Istat.jpeg

“The impact on 2021-2022 deficit/GDP ratio was expected, given the methodological change introduced by Eurostat, but was not reflected in the dynamics of debt which confirmed an improving downward trend to less than 145% of GDP last year,” Federico added.

The public debt – proportionally the highest in the euro zone after Greece’s – fell to 144.7% of GDP in 2022 against a government target of 145.7%, ISTAT said.

The 2022 level decreased from a downwardly revised 149.8% in 2021, with the decline helped by strong inflation, which raises gross domestic product and therefore proportionally lowers the debt-to-GDP ratio.

Looking ahead, Italy expects economic growth of almost 1% this year, up from the 0.6% target set in November, the Treasury official said.

In the fourth quarter, GDP contracted by 0.1% from the previous three months, according to ISTAT’s preliminary reading issued at the end of January.

(Editing by Alex Richardson, Kirsten Donovan)

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