Bank of Italy sees modest Italian GDP recovery in next two years

ROME (Reuters) - The Bank of Italy sees a slowdown in the Italian economy this year, with expansion of just 0.1%, and a modest recovery thereafter, when growth is seen at 0.8% in 2020 and 1.0% in 2021, it said on Friday it its quarterly economic bulletin.

The central bank sees industrial production declining in the second quarter by around -0.7% versus the previous three months.

"A heightened uncertainty about budget policy from next year on could generate new turbulence in the financial markets and influence firms' investment plans", the central bank said.

"A virtuous circle between fiscal policy and financial conditions could instead boost economic activity".

The central bank's growth forecast for this year is marginally below the government's 0.2% official forecast.

The euro zone's third largest economy eked out growth of 0.1% in the first quarter, emerging from a shallow recession in the second half of last year. National statistics institute ISTAT has warned the second quarter may show another contraction.

Turning to the state of Italy's banks, the Bank of Italy said the ratio of non-performing loans (NPLs) to total outstanding loans was at 8.4% in the first quarter of 2019, compared with 8.3% in the last three months of 2018.

(Reporting by Francesca Piscioneri, editing by Gavin Jones)

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