Italy’s government slashed its growth forecasts for 2023 and 2024 and increased its budget deficit targets as mounting interest rates impact the economy.

With the second largest debt pile in the eurozone as a proportion of output, Italy is coming under growing criticism from investors concerned about the weakening of the economy.

The yield gap between Italian and German 10-year bonds – used as a measure of market sentiment towards Italy – edged up on Wednesday above 1.95 percentage points, the highest since the beginning of May, Reuters reports.

The Treasury forecast GDP in Italy’s economy to increase by 0.8% in 2023, a reduction from a 1% forecast set in April within its Economic and Financial Document (DEF), which will form the structure for the budget.

The growth target for next year was lowered to 1.2% from 1.5%.

“The outlook has changed mainly due to two factors: restrictive (European Central Bank) monetary policy and the war in Ukraine,” said Economy Minister Giancarlo Giorgetti.

The government increased its deficit target for 2023 to 5.3% of GDP from 4.5%, with the impact of the slowing economy on state accounts worsened by pricey incentives for energy-saving home improvements.

Such incentives were implemented before Prime Minister Giorgia Meloni took office in 2022 and bolstered a robust post-pandemic growth rally in 2021 and 2022.

Yet, costing €54 billion, or 2.8% of GDP last year, the incentives have become more of a burden than initially thought for government coffers when the deficit was far above the 8% of GDP target.

The deficit objective for 2024 was increased in the Economic and Financial Document to 4.3% of GDP, a rise from the previous 3.7% goal.

Italy’s public debt, proportionally the highest in the eurozone after Greece, is forecast to stay stable at 140% of GDP through to 2026.