Milan (AFP) - Italy's government must overhaul its labour market to kick-start its economy, which is set to shrink for the third year running in 2014, the International Monetary Fund said on Thursday.
Gross domestic product is expected to contract 0.1 percent, the Washington-based fund said in a report, cutting its previous forecast that Italy's economy would expand by 0.3 percent.
Unemployment is set to average a record 12.6 percent, the IMF predicted, urging Rome of the need to push through planned changes to how employment contracts are structured.
"Prime Minister Renzi has outlined a bold reform agenda. Firm implementation is now essential to create jobs, increase productivity and lift potential growth," the IMF said in a statement.
Italy's premier Matteo Renzi has made overhauling labour rules a cornerstone of his efforts to revive the country's ailing economy, one of the most sluggish and indebted in the eurozone.
But his ability to turn around the bloc's third-largest economy, which fell back into recession in the second quarter, has been thrown into doubt as he has struggled to push reforms through parliament.
Finance Minister Pier Carlo Padoan this week was forced to admit that "it is possible" Italy's economy may shrink again this year after three years of painful contraction.
Ratings agency Standard & Poor's on Monday warned that the delays to structural reforms "have failed to improve the confidence of the business community and investors" in Italy.
Weak growth is also being felt in the government's coffers. Public debt, already the second-highest in the eurozone after Greece, is set to expand to 136.4 percent, from 132.6 percent in 2013, the IMF said.
The fund was more optimistic for the future, however, predicting Italy's economy will rebound to growth of 1.1 percent next year, increasing to 1.3 percent in 2016.
Still, it warned that broader risks remain substantial, particularly the conflict in Ukraine, which has seen Brussels impose sanctions on one of Italy's top trading partners, Russia.