The European Commission has slashed its growth forecasts for Italy’s economy in 2023 and 2024, following a series of weak data, limiting the prime minister’s scope for promised tax cuts next year.

Italy’s GDP is forecast to grow by 0.9% in 2023 and 0.8% in 2024, according to the European Commission, signalling a downward revision of 0.3 percentage points for each year.

Whereas the Italian government, which is scheduled to update a series of economic forecasts by 27th September, projected April GDP growth of 1% in 2023 and 1.5% in 2024.

Although the Treasury said Italy could still reach this year’s target, the latest indicators imply the 2024 objective is out of reach, Reuters reports.

Following a strong rally in Q1 this year, Italy’s GDP contracted by 0.4% in Q2, and the country’s services and manufacturing sectors shrank in August, hiking the risk of weak economic activity continuing into Q3.

“The phasing out of the extraordinary and temporary incentives for building improvements decided during the COVID-pandemic, which pushed construction activity up sharply in the past two years, contributed to this development,” according to the European Commission.

Furthermore, investment activity is forecast to contract for the remainder of the year and then enjoy a moderate pickup next year. The EU added that net exports are forecast to offer a lesser degree of support to growth in 2024.

Inflation, according to the EU-harmonised HICP index, is forecast to moderate to 5.9% in 2023 and 2.9% in 2024, the EU said.

Last week, sources told Reuters Italy was preparing to increase its 2023 budget deficit-to-GDP ratio above the 4.5% target of GDP set in April. The government is also working on ways to prevent or limit additional shifts away from the 3.7% objective for next year.