By Antonella Cinelli
ROME (Reuters) - Italy has fallen into an economic "abyss", employers' lobby Confindustria said on Thursday, slashing its growth outlook for the euro zone's third largest economy and projecting big overshoots of its deficit targets.
The dire economic outlook underscores the pressure on Prime Minister Mario Monti to bring home more pro-growth policies and a mechanism to limit soaring borrowing costs from a European Union summit in Brussels that starts later on Thursday.
Confindustria estimated the economy would contract by 2.4 percent in 2012, compared with a December forecast for a 1.6 percent fall. Gross domestic product would fall 0.3 percent next year, compared with a previously forecast 0.6 percent increase.
"We're in the abyss," Luca Paolazzi, head of Confindustria's research unit, commented as he presented the new forecasts.
"We're not in a war, but the economic damage caused so far is equivalent to a conflict, and the most vital and valuable parts of the Italian system have been hit: manufacturers and the young generations," he said.
The deeper-than-expected contraction will slow Italy's deficit reduction, with the budget shortfall seen at 2.6 percent of GDP in 2012 and 1.6 percent in 2013, far worse than the government's forecasts.
In December, Confindustria put next year's shortfall at just 0.1 percent of GDP.
In April, the government pushed back its balanced budget target a year to 2014, saying its 2013 deficit would be 0.5 percent, a third of what Confindustria forecast on Thursday.
The main parties backing Monti's unelected government suggested that either Italy should push its balanced budget target back further, or the EU should allow some spending, like that on infrastructure, to be excluded from the calculation.
The severe recession that started during the second half of last year was worsened by austerity measures that Monti passed in December to accelerate deficit reduction and restore investor confidence in Italy's 1.95-trillion-euro debt.
TAX BURDEN
The higher taxes, estimated at an extra 24 billion euros for this year alone, have eroded Monti's approval rating from more than 70 percent when he took office to 33 percent, in an SWG poll published last week.
Confindustria said tax revenue was "accelerating strongly" this year. The tax burden is rising and will reach 54.2 percent of GDP in 2012, when adjusted to take account of tax evasion, three percentage points more than 2011, employers said.
As taxes rise, Italian consumer spending is falling. April retail sales dropped 1.6 percent from a month earlier, the steepest fall in eight years.
Consumer spending fell 1.0 percent in the first quarter, when GDP declined 0.8 percent. Consumer confidence plunged in June to its lowest level since the series began in January 1996, according to statistics office ISTAT's monthly series.
Italian debt will jump to 125.7 percent of GDP this year from 120.1 percent in 2011, and edge up marginally to 125.8 percent in 2013, Confindustria said.
If Italy's contributions to the euro zone bailouts are stripped out of the debt calculations, the country's debt would be 122.6 percent this year and 122.2 percent next year, it said.
(Additional reporting by Francesca Piscioneri; Writing by Steve Scherer; Editing by Robin Pomeroy)
