Thank's to Roberto at Wind Rose Hotel for pointing me to this piece in Time Europe:
"Italy is now on course to become quite literally the oldest of countries. Beset by economic and social stagnation that makes it among the most ossified slices of Old Europe, it is stuck with a stubbornly low birth-rate that means Italians are not even replacing themselves. In a more fundamental way, the nation has not figured out how to make use of the energy and ingenuity of its young. Faced with bleak job prospects and a lack of young leaders to look to, Italians in their 20s and 30s risk falling into a nationwide generational rut. Many are afflicted with a pervading sense of hopelessness and malaise that contrasts with the youth-driven vigor boosting states like Sweden or Slovenia."
I'm not sure that this isn't a rather idealised picture of Sweden and Slovenia (who also have their ageing issues coming) but it certainly seems to be fair comment about Italy. And especially this part:
At the core of the dilemma lies Italy's aging but long-lived population. For the past generation, the birthrate has remained at or near the bottom of world rankings, stuck last year at 1.3 children per woman (compared to 2.7 in the mid-1960s). That has fundamentally tilted the economy: in the past 10 years, the ratio of retired to working Italians has jumped from 23% to 28% — the second highest in the world — clipping productivity and jeopardizing the solvency of the pension system. Without an unexpected surge in births, that ratio is expected to double by 2040.
Italy is hardly the only industrialized nation to face a demographic time bomb. But elsewhere in Western Europe, the declining birthrate tends to be caused by eager young people striking out on their own who are too focused on satisfying immediate ambitions to take on the burden of rearing children. In Italy, says Francesco Billari, 35, a demographer at Milan's Bocconi University, the empty cradles are the fruit of exactly the opposite phenomenon: an adolescence prolonged well into the 30s.
Nowadays, the average Italian man is 33 when his first child is born, making Italian men the oldest first-time fathers in Europe. There are plenty of reasons: drawn-out university studies, inadequate child care and, frankly, not enough young adults willing to grow up. "Italians take a long time to assume responsibilities," Billari explains. "Everything," from moving out of the parental home to marrying and having kids, "starts late."
A peculiarly Italian part of the problem is the stay-at-home son, or mammone. More than 80% of men aged 18-30 still live with their parents, enjoying the coddling of doting mamas who take care of all the boring details of daily life, leaving the son free to spend his time and his income on pleasing himself. Who'd want to give that up before he had to? Nowadays, the typical young Italian mammone has even become a figure of ridicule.
Essentially what we are seeing is a society which is insufficently able to flexibilise institutionally (whether at the government, employment market, corporate or family levels) to be able to confront the problems posed by rapid ageing.
Italy At A Glance - January 2008
Welcome to the Italian Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data which we hope will help the first time reader better assess and get to grips with the argument being presented on the blog. In what follows you can find charts for Italian male life expectancy, median age, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Basically this data provides a summary of the argument which we are presenting on this blog, which is that in order to understand Italy's long term and ongoing economic malaise you need to understand something about Italian demography, and it's macroeconomic consequences. Please click on thumbnails for better viewing.
With such weak internal consumption growth Italy badly needs to run a trade surplus to obtain the economic growth necessary to make public finances sustainable. In this Italy is similar to Germany and Japan, and different from domestic consumer driven economies like the UK, France and Ireland. Long term fertility and life expectancy really do matter, since they condition labour force growth
and consumption patterns, and with these productivity and the growth of internal credit and consumer demand. Above left you can find Italy's ferility rate, and above right the evolution of the 25 to 49 age group, which has just passed it historic peak. On either side here you can see charts for recent quarterly GDPand long run annual GDP.
Arguably these are all the data points you need to understand my lengthy post on The Euro Area and Italy's De-Facto Dependence On Exports, as well as why it is that the danger Italy may once more fall into recession presents us with the difficulty of what the credit ratings agencies will say about the resulting impact on the government debt situation.
2008 Forecasts: The OECD in December revised their 2007 Italian forecast down to 1.8%, and the 2008 one down to 1.3%. Confindustria also revised their forecast down in December, arguing that growth would slow to 1 percent in 2008 from an 1.8 percent this year, citing factors like the rising cost of food and oil and the rise of the euro against the dollar. Such numbers are clearly not encouraging, but arguably downside risk for 2008 is greater even than either the OECD or the Confindustria forecasts reflect Morgan Stanley's Vladimir Pillona is somewhat more sanguine. While presenting the MS central forceast for Italian economic growth to slow to 1.0%Y in 2008, from 1.8%Y in 2007, he goes on to note that "even annual GDP growth of 0.5%Y next year has a significant possibility of occurring, as shown by our model’s forecast error bands".
I personally will be very surprised if we still see calendar year 2008 anything like as high as 1.8%, but more to the point even 1.3% may be rather on the high side if we get a significant deterioration in the external environment, especially in Eastern Europe on which Italy is fairly dependent, and where the Italian banking sector has significant exposure. So that puts me much nearer to Pillona's "basement bargain" number of 0.5% than to any of the others. One of the reasons for my pessimism relates to my assessment of Italy's current trend growth rate, and to the level of fiscal and monetary tightening which may be operating on the economy even as it slows. During 2007 the Italian govenment has been running a fiscal deficit of comfortably below the 3% of GDP required by the EU commission. But since this fortunate situation was in part acheieved by the use of one off measures, and in part by the strong tax inflow from the above trend growth, the government will need to maintain a comparatively tight fiscal stance to keep things on course, and any attempt to further loosen may run into real problems with the EU commission and the credit rating agencies. And as I keep arguing, it is very hard to see an accomodative monetary posture from the ECB in the near future. The IMF in their October World Economic Outlook came in with a similar figure of 1.3% for 2008, the Economist Intelligence Unit is forecasting 1.7% in 2007 and 1.4 in 2008, and the latter 2008 figure was also endorsed by the EU commission in its November forecast.
As I indicate, my own view is well to the downside of all this. The only apparent bright spot on the horizon is employment, but I am dubious that in the context of Italy's ageing workforce this will work through as some are hoping, as I expain at some considerable length in this post here. My opinion is that Italy will enter recession at some point during 2008, and that we may well have 2 consecutive quarters of negative growth. The continuing high euro will maintain pressure on Italian exports, and high oil and food prices will maintain pressure on the inflation front, at least in the firts half of 2008. At the same time, and despite rumours that Romano Prodi's government is compemplating a large tax cutting package, I anticipate that the fiscal environment will remain tight. Italy's large (106% GDP) accumulated debt, and the vigilance from the gentlmen at Standard and Poor's and the other credit rating agencies more or less guarantee that.
As most of the forecasts suggest, we have been seeing growth which is somewhat above trend during the upswing in the last couple of years, so it would not be surprising if we now saw some below trend growth. Trend growth (over a 5 year average) in Italy may even have fallen into the 0.5 to 1% range, so if I have to put a number I would say 0.7% with a definite "downside risk" tag attached. The nearest forecast to this that I have seen is the 1% one from the Morgan Stanley GEF team. The implications of such sustained low growth are, I think, important, since if Italy cannot find the way to raise trend growth up towards the 2% mark there is simply no way the government debt can be stabilised and sustained. And with each passing year we have one year less to crunch time.
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