ROME (Reuters) - Italy's economy will shrink in 2014 for a third year running, while the public debt will continue to rise, the International Monetary Fund said on Thursday, calling on Matteo Renzi's government to follow through on promised reforms.
Gross domestic product will fall this year by 0.1 percent following declines of 1.9 percent in 2013 and 2.4 percent in 2012, the IMF said, cutting its previous forecast for growth of 0.3 percent, made at the end of July.
The IMF, whose forecasts on Italy have been consistently too optimistic in recent years, forecast that next year Rome will see growth of 1.1 percent - unchanged from its previous estimate - thanks to an improvement in credit conditions and the effects of easing measures by the European Central Bank.
However, the IMF mission chief for Italy said Italian data since the estimates were compiled had been disappointing, so downward revisions for both this year and 2015 can be expected when the fund issues its next round of forecasts in October.
"Recent data has been softening and it does point to downside risks ... we are in the process of revising our forecasts," Kenneth Kang told reporters in a conference call.
Italian growth has averaged around zero since 2000 and has reached one percent only once in the past five years.
Italy's public debt, the second highest in the euro zone after Greece, will rise almost four points to 136.4 percent by the end of this year from 132.6 percent in 2013, the IMF said in a report on its annual Article IV consultations with Italy.
It called on Renzi's coalition government to ensure "firm implementation" of its agenda of reforms to tackle record unemployment and increase productivity.
Renzi, who took power in February when he ousted his predecessor Enrico Letta in an internal party coup, is facing mounting criticism over the slow pace of reforms in areas such as the judicial system, the public administration and the labor market.
The IMF estimated that Italy's potential growth rate, the cruise speed at which the economy can grow without generating inflation, is now around zero. Kang said the fund expected this could rise to around 0.5 percent "in the medium term."
The Organisation for Economic Co-operation and Development and Italian employers' association Confindustria both forecast this week that Italian GDP would contract 0.4 percent this year, with the OECD projecting growth of 0.1 percent next year and Confindustria forecasting 0.5 percent expansion.
Despite the weakening economy, Renzi will manage to keep the fiscal gap just inside European Union limits this year, the IMF said. It raised its forecast for the budget deficit to 3.0 percent of GDP - bang on the EU's ceiling for the third year in a row - from a 2.7 percent forecast in April.
The IMF also projected that Italy, which in August saw consumer prices post an annual decline for the first time since 1959, would avoid an entrenched period of deflation. It said consumer prices would rise at an average rate of 0.4 percent this year, accelerating gradually to 1.0 percent in 2015.
Reporting By Gavin Jones