Morgan Stanley slashes Italian growth outlook amid budget woes

• It is the opinion of the Italian government that increasing spending with infrastructure projects and providing people with more income will revive the subdued Italian economy.
• The idea is to put forward a Citizenship Income, aimed at alleviating poverty and improving social inclusion. Such policy is set to cost 0.37 percent of the country's total growth in 2019.

Deputy Prime Minister and Labour Minister Luigi di Maio(L), Italian Prime Minister Giuseppe Conte(2L), Italian deputy Prime Minister and Interior Minister Matteo Salvini(2R) and Italian Economy and Finances Minister Giovanni Tria(R) hold a press conference on the Italian budget on October 15, 2018 in Rome, Italy.

Antonio Masiello | Getty Images News | Getty Images

Italy will struggle to achieve the growth rate that the anti-establishment government has planned for 2019, according to Morgan Stanley.

In its latest 2019 budget draft plan, Rome forecasts a growth rate of 1.5 percent for 2019 — compared to Morgan Stanley's latest forecast of just 0.5 percent for gross domestic product (GDP) next year. The figure showing the investment bank's forecast is only one-third of the Italian government's own estimate.

"We expect a contraction in economic activity towards year-end, mainly driven by domestic demand, both consumer spending and business investment," the bank said in its European Economic Outlook note, published this week.

"Further out, the fiscal boost to growth will probably have some beneficial effects on consumption. But it's unlikely to be so big as to result in an improvement of the public finances," the note added.

The Italian government expects increased spending on infrastructure projects and providing people with more income will revive the subdued Italian economy.

Giovanni Tria, the Italian finance minister, said in a letter to the European Commission earlier this month that "tackling the social problems caused by the negative trend in the economy is equally important and urgent."

The idea is to put forward a Citizenship Income, aimed at alleviating poverty and improving social inclusion. Such a policy is set to cost 0.37 percent of the country's total growth in 2019. Morgan Stanley also noted that market conditions and a drop in exports will lead to lower growth rates in 2019.

"A further tightening in financial conditions and falling sentiment are both key risks."

Italy's 2019 budget plans have sparked market concerns for about three months now. The government wants to increase spending in 2019 in a way that both investors and European officials deem unsustainable with the country's high debt pile.

The country's 130 percent debt-to-GDP figure is the second largest in the euro zone.

"In a triple whammy, weaker growth and rising financing costs can jointly stress the state coffers, weaken the banking system and produce a knock-on effect on the real economy," the investment bank warned.