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UPDATE 1-Italy readies new package to lift GDP, mini-budget ruled out -sources

Gavin Jones and Giuseppe Fonte

-sources@

* Govt to cut GDP forecast but sees 2019 growth still positive

* Expects Q1 GDP data to show shallow recession is over

* Readying "growth decree" to boost public, private investments (Adds quotes, details, background)

ROME, March 26 (Reuters) - Italy is preparing a package of measures to lift economic growth this year and avoid the need for belt-tightening measures, political sources told Reuters, confirming a strategy which favors fiscal expansion over austerity.

The package is part of a plan to allow the government to present a relatively upbeat 2019 projection for gross domestic product which will in turn be the basis of new deficit and debt targets to be issued next month, the sources said.

The "growth decree," which the cabinet hopes to pass on Friday, will increase tax breaks on investments, cut property taxes on factories and warehouses, and simplify procedures for public tenders, according to a draft seen by Reuters.

Among an array of measures, it will also allow local authorities to spend more on investments and introduce new rules to help banks shed so-called "unlikely-to-pay" loans.

The timing of the decree is important because it comes shortly before the Treasury presents new public finance targets in its Economic and Financial Document (DEF), which is due by April 10. This forms the framework of the 2020 budget.

Italy fell into recession over the second half of 2018, with gross domestic product falling 0.1 percent in each of the last two quarters. This hit the carry-over effect on 2019 and left the official forecast of 1 percent 2019 GDP growth percent looking wildly optimistic.

That forecast will be cut in the DEF but it will remain in positive territory and above those of most independent economists, said three sources in the government of the anti-establishment 5-Star Movement and the right-wing League.

The sources asked not to be named because they were not authorized to talks about the DEF.

FRAGILE RECOVERY?

Recent Italian data has shown signs of improvement, leading to optimism among policy-makers that the country has already emerged from last year's shallow recession.

In January, industrial output, orders and sales all jumped from the month before and employment increased .

That was followed by an unexpected pick-up in service sector activity in February.

"It's early days but there is a feeling the worse may be behind us," said one government source. Three officials said they expected GDP to be flat or positive in the first quarter.

Despite these fragile signs of recovery, the Treasury's latest projections point to 2019 growth only slightly above zero, based on an unchanged policy scenario, two sources said.

This will probably be nudged up to around 0.5 percent thanks to the effects of the growth decree, one of those sources said. The other said it was too soon to indicate the new target.

The European Commission forecasts Italian 2019 growth of just 0.2 percent, while the Organisation for Economic Cooperation and Development sees a 0.2 percent contraction.

The weaker growth outlook will hurt public finances, lowering tax revenues and raising the deficit as a proportion of GDP, yet the sources said the government had no intention of adopting belt-tightening measures this year.

The 2019 deficit target of 2 percent of GDP, set in December, was deliberately based on what then seemed a conservative estimate of GDP growth of 0.6 percent, below the official 1 percent forecast, said one source.

"The message is that thanks to the upcoming decree we can still grow close to that 0.6 percent," this source said.

Even if the recovery fails to materialize, the government's view is that tightening policy at a time of recession is counter-productive and has therefore been ruled out, four sources said. (Reporting by Gavin Jones and Giuseppe Fonte; Editing by Crispian Balmer and Ed Osmond)