The Bank of Italy slashed its economic forecast for this year on Friday to project a worst contraction than expected earlier, citing the deteriorating external environment and the continuing weakness in domestic activity. The bank now expects the Italian economy to shrink 1 percent this year, which is much worse than the earlier projection of 0.2 percent contraction. Gross domestic product likely declined just over 2 percent in 2012, the bank said in its latest economic bulletin. The bank expects a modest return to growth in the second half of 2013, that could lead to growth in 2014. Inflation should continue to ease during this year due to weak demand and low cost pressures, the bank said. Credit conditions remain tight and the non-performing loans have increased significantly, the bank noted. The general government borrowing requirement, net of disposals and loans from the European Financial Stability Facility, will be around 3 percent of GDP in 2012 versus 3.9 percent in 2011, the bank said. Public finances are expected to improve further in 2013-14 despite a weak economy. The debt to GDP ratio is expected to start falling in 2014, the bank added.