ROME Italy will have another year of recession in 2013, deeper than the government expects, and its huge public debt will steadily rise to a new peak by 2014, a Reuters poll showed on Thursday.
The consensus of more than 20 economists polled in the past week projects a 2.4 percent contraction in the euro zone's third largest economy this year - the same as the government expects.
The Reuters poll, however, foresees a further 0.7 percent contraction in 2013, compared with a government projection of a 0.2 percent contraction.
"Italy is being engulfed by deep recessionary conditions, the gloomier outlook reflects the relentless pounding from the euro zone debt crisis," said Raj Badiani of IHS Global Insight.
The previous quarterly survey in July pointed to a 2.1 percent contraction this year and a 0.3 percent drop in 2013, while an April poll envisaged a 1.5 percent fall in 2012 and stagnation in 2013.
Italy's borrowing costs have fallen in recent months as a result of a pledge by the European Central Bank to buy potentially unlimited amounts of bonds of countries in difficulty. Faith in technocrat Prime Minister Mario Monti has also helped steady markets.
However, investors are concerned about what will happen when Monti's term ends in the spring, with little prospect of a stable government emerging from the elections.
On a quarterly basis, the economy is set to contract in the third and fourth quarters of this year and will not grow until the third quarter of 2013, and then only by a meagre 0.1 percent, the poll showed.
Italy has been in recession since mid-2011, weighed down by austerity measures implemented to stave off a debt crisis.
On Wednesday, Monti announced income tax cuts for low earners to kick in just a few months ahead of next year's vote, a surprise move which will however be offset by a hike in sales tax and a raft of spending cuts aimed at meeting budget goals.
Despite Monti's austerity measures introduced since he took office a year ago, the outlook for Italy's public finances has also steadily worsened.
This year's budget deficit will come in at 2.6 percent of output, according to the Reuters poll, up from 2.3 percent in the July survey, while the 2013 forecast is hiked to 1.8 percent from 1.3 percent.
"Italy remains well placed to cover its debt redemptions in the final months of 2012, but the challenges are more acute in 2013. Italy faces some significant headwinds, particularly the fallout from a deepening recession and the prospect of significant fiscal slippage," said IHS's Badiani.
Monti pledged a balanced budget in 2013 when he replaced a discredited Silvio Berlusconi and Italy's borrowing costs soared, but European partners have taken an indulgent view of subsequent slippage which Italy says is due to the recession.
The poll's deficit forecasts for this year and next are in line with the government's, which were steeply revised up last month as the extent of the recession became apparent.
Perhaps of greater concern than the budget deficit is the profile for Italy's massive debt.
The debt-to-GDP ratio, already the second highest in the euro zone after Greece's, is forecast to rise from 125 percent this year to 125.7 percent in 2013 and hit a new all-time high of 126.2 percent in 2014.
The recession is also taking a toll on jobs, with unemployment projected to rise from 10.6 percent this year to 11.5 percent in 2013 and 11.6 percent the year after.
(Editing by Jeremy Gaunt.)