Now Back in September I said this:
Italian consumers appear to be feeling good. This is welcome news, but as an economist I have to ask myself whether this feelgood effect is sustainable.
And as I would also say, you shouldn't read too much into consumer confidence indexes which are known to be highly volatile, so I won't (in this sense the investor sentiment indexes are much more revealing). All I would say is that Italian consumer confidence isn't holding where it was, and this does seem to be coherent with the underlying fundamentals.
Now Paris often suggests I offer a one sided reading of things, so I would be interested to hear anything that anyone else may have to say.
I would just point out that both Claus Vistesen and I have been arguing for some time now that the Eurozone is slowing, and that there isn't going to be a Goldilocks recovery, and that the ECB is seriously out of touch with reality on this point. No doubt at some stage they too will correct.
Figures on French consumer spending out today simply fill in a few more details in the picture.
Italian consumer confidence fell in October from a four-year high on concern that higher taxes included in the government's budget plan and rising interest rates will leave households with less to spend.
The Rome-based Isae Institute's index, based on a poll of 2,000 households, dropped to 108.6 in September, from a 4-year- high of 110.1 in August. The reading was lower than the 109.8 median forecast of 19 economists surveyed by Bloomberg News.
``The uncertainty surrounding the 2007 budget, and the perception that the government is raising taxes likely had an impact,'' Matteo Radaelli an economist at Rasbank SpA in Milan said. ``Higher interest rates, which make mortgage payments more of a burden, may also have affected confidence.''
The drop in Italian confidence reflected growing pessimism in Europe. French consumer spending on manufactured goods declined the most in 10 years in September, a government report said today. German investor confidence fell to the lowest in 13 years in October, an Oct. 17 report by the ZEW Center for European Economic Research showed.
Italians were more pessimistic about the prospects for growth with the index on the outlook for the economy falling to 97.0 from 100.1, Isae said. Perception of personal wealth was also negative with the index declining to 113.0 from 115.6, the lowest in six months.
Italy Economy Real Time Data Charts
Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Italy related comment. He also maintains a collection of constantly updated Italy economy charts together with short text updates on a Storify dedicated page Italy - Lost in Stagnation?
7 comments:
Back in September you did say that. And now Italian Consumer Confidence has fallen from a four year high. Congratulations and big deal.
Am I concerned? No.
Do I think this is a harbinger of more bad news? No.
Do I think it is important? No.
Unlike in Anglo-Saxon economies, in Italy the Consumer is not the driver of economic activity, is not maxed-out on debt (current household debt to income ratio stands at about 35% of annual income - compare and contrast if you will with debt levels in the U.S., the U.K., New Zealand and Australia. I'm not going to do ALL your homework for you.)and is still sitting on a large pile of savings.
If the Italian Consumer had been MORE confident than previously, after the release of Prodi's second-rate Budget, I would have started to seriously worry about the extent of recreational drug use in Italy.
Time to really tackle reform:
Pension Reform.
Just watch the greediest generation start to complain.
Now here is some accurate, informaed analysis by Morgan Stanley on Italy:
LINK
I'm going to post the entire report, since the link doesn't seem to take you to the right place:
The downgrade of Italy by two credit rating agencies is likely to re-invigorate a theory that has some popularity in the financial markets, namely that Italy could well be the first casualty of an ill-conceived monetary union. The rationale: Italy has suffered from a huge loss of competitiveness, its productivity is at a standstill and its public debt is running out of control. Real life has demonstrated that the country cannot compete with her neighbours on a level playing field, i.e., not without the repeated ‘shots in the arm’ provided by devaluations. According to this line of reasoning, investors should ultimately impose a higher risk premium and, as debt servicing becomes more costly, their pessimism would turn into a self-fulfilling prophecy: Italians would start dreaming of a 1992-style devaluation as the only way to bail out their flagging economy, at the expense, of course, of their main trading partners.
I am afraid that the script of this horror movie is based on flawed macroeconomic analysis and poor use of dubious statistics. On the contrary, I believe that Italy is on the mend and likely to attract considerably more foreign capital than it has done in the past.
First, three key hard facts do not square with this ‘Italy bashing’. Since the inception of EMU, Italian GDP has increased by 1.33% per year versus 1.31% for Germany. I wonder which economy was the sickest. Italy’s trade balance was in perfect equilibrium in 2005, with the non-oil balance posting a hefty 2.4% GDP surplus. In contrast, Britain’s and Spain’s trade deficits were, respectively, 5.6% and 7.6% of GDP last year. Last, Italy’s harmonised unemployment rate dropped from 11.4% just before EMU started, to 7.4% on the latest reading, only two points above the UK level. This is a much larger decline than in France or Germany and comes second only to Spain. Italy bashers, who are at pains to explain how a lame duck could manage to reduce unemployment without fuelling wage inflation, may question the quality of unemployment statistics. However, these measures are based on large-sample household surveys and are therefore more reliable and consistent than claimant counts, which are reliant on national unemployment insurance systems. Nevertheless, they have some idiosyncratic features on which I will comment later.
So why are so many analysts convinced that Italy has been priced out of the game by super-competitive Germany? Because they look at measures of competitiveness such as unit labour costs or export volumes. On these criteria, the Italian situation looks truly desperate. Take, for example, the relative unit labour costs in the manufacturing sector calculated by the EU Commission. On this measure, Italy’s competitive position relative to its euro area partners has lost 23.5% since 1999 while Germany’s position has improved by 17.6%. There is worse to come: on the OECD measure of real export market performance, Italy has lost 27 points of market share since 1999, twice as much as France, while Germany has gained 4.1 points. Clearly, something must be wrong: how could an economy suffering enormous losses of competitiveness boast a falling unemployment rate and a balanced trade account?
In my view, both unit labour costs and export volumes are tainted by serious statistical uncertainties. Starting with unit labour costs, the weak link is not the measure of costs, but that of productivity, a notorious headache for statisticians. On data gathered by the US Bureau of Labour Statistics, Italian hourly productivity in manufacturing was the same in 2005 as it was in 1999, while it increased by 27% in Germany and France over the same period. I find it hard to believe that Italian hourly productivity has really stagnated for six years, and suspect that a combination of large-scale regularisation of illegal immigrants and tax incentives for employers to hire employees who were working without being recorded in payrolls have distorted productivity data. In short, hundreds of thousands of workers in Italy have moved from the black to the legal economy, artificially bringing down productivity data and probably flattering unemployment numbers as well: It is likely that black economy workers answered ‘No’ when asked the question ‘Are you working?’ in the household survey, and now say ‘Yes’ if they have been hired legally in the meantime.
In fact, since the output of the underground economy is included in GDP as measured by ISTAT, it is fair to say that both past productivity and past unemployment levels were artificially inflated and that current data are closer to reality. From this angle, the fact that a four-point cut in the unemployment rate did not fuel wage inflation becomes less intriguing: in reality, unemployment has declined less than official measures suggest. Back to productivity, the rate of growth was underestimated because of these changes in the structure of the labour market. In the real world, hourly labour productivity has probably increased in Italy about as fast as in the average of mature economies, as a result of technological progress and capital deepening. The problem is that we do not know exactly at what rate.
Turning to exports, here is the conundrum: standard indicators say that Italy’s competitiveness has been seriously eroded and, yet, Italian exports are doing well, compared with its peers. On OECD data, Italy’s market share of global trade, measured in current dollars, was 3.7% in 2005 versus 4.1% in 1999, a 10% decline. The OECD bloc suffered from the same loss — its market share dropping from 74.5% to 66.9% over the same period, in favour of China and oil-exporting countries. A more relevant measure of Italy’s export performance is to compare its nominal exports with those of the euro area. On this yardstick, the only one that really makes sense in a currency union, Italy actually outperformed its peers: Italian nominal exports have increased by 4% more than the average of EMU country exports since the inception of the monetary union. Here, I believe that the statistical flaw is in the measure of prices. In reality, for lack of a direct measure, ISTAT is using unit values, i.e., export values divided by quantities. When the euro shot up, in 2002-03, a very counterintuitive fact was that Italian export ‘prices’ (in fact unit values) increased. In my view, this point, which escaped analysts’ attention, reveals the underlying and hidden truth: Italian producers have reacted to globalisation by off-shoring production centres to low-cost countries such as Romania and Tunisia and, more importantly, by upgrading their product mix towards more expensive products, in the fashion sector to take a well-known example. Here again, the problem is that there is convincing indirect evidence, such as the export performance, that corporate Italy has changed for the better, but no direct and reliable statistics.
Don’t get me wrong. I’m not saying that Italy is the new corporate Eldorado or the next stellar macro performer in Europe. The public debt inherited from the past is a permanent sword of Damocles. Labour laws, especially redundancy rules, are rigid, corporate governance is weak, the internal market is inefficient, especially for services, the commercial property market is opaque and in the hands of a small group of investors, bureaucrats and their love affair with ‘documenti’ are not particularly business-friendly, the population is ageing, pension reform is still ‘a work in progress’ and healthcare reform is still in limbo. And yet, at the margins, Italy might be the place where change is taking place at the greatest speed. In this regard, Mr. Prodi’s strategy is the right one, I believe: commitment to budget consolidation, reduction in non-wage labour costs in order to boost employment and reduce further structural unemployment, and supply-side reforms such as the liberalisation of services. In fact, I would have a wager that the credit rating agencies may sooner rather than later have to re-evaluate the Italian case in a more positive light, given faster potential growth and lower budget deficits. Investors should not wait until then.
Thanks for the info Paris, the actual link is here.
Eric Chaney has a point of view, I just don't happen to agree with it. If you look through the article, I think I'm write in saying that you won't find either the words fertility or ageing once. So my feeling is that something is missing from this analysis: namely sustainability, but again, you already know my views.
Incidentally:
"Since the inception of EMU, Italian GDP has increased by 1.33% per year versus 1.31% for Germany. I wonder which economy was the sickest."
The point is they are both "sick" if you want to put it this way, since they both have median ages of 44 and they both have slow growth records which reflect this. They both are suffering from the same disease. Except that the German economy has been stronger in international competition, and Germany is richer, and the size of the German deficit as a % of GDP is higher. These are the reasons that I think Italy is weaker, and will burst first, not that Germany is just fine. IMHO Chaney just doesn't understand this problem.
"and the size of the German deficit as a % of GDP is higher."
Sorry, typo, I meant "lower" not "higher".
Edward you are going to have to make up your mind if this is a blog on "demographics" or on the Italian economy. If you want to write a blog on why demographics is the determinant of most things economic in Italy then maybe you should make that clear. Personally, as you know, the exit of the baby boom population bulge is a welcome event, in Italy and elsewhere. And the outlook for the Italian economy is still positive, despite the problems.
And I'm not sure you can say "Germany is richer". I don't think so. At any rate I think if you are writing a blog with a point to prove a priori then you should probably be a bit more explicit about it.
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