Mario Draghi is Governor of the Bank of Italy. Earlier today Hans sent me the following e-mail comment:
Senator La Malfa asked governor Draghi in a committee hearing if he had something to say about the FT piece about an Italian Default. Draghi said: "the writer has no idea of what he is writing about. Because the very people sitting in this room will be the ones that will not allow anything the like to happen." This is not a citation but what I remember having heard (radio radicale).
That sums is up nicely. I recommend a sober and cool look at this stuff, personalising doesn't help a bit. B or P, A or O is all the same.
Yesterday government and Confindustira have agreed on exempting companies with less than 50 employees from TFR transfer . That's the kind of fight we will see and it will not end before Xmas.(end of extract)
Now Mario Draghi is, as is reasonably well known, a strong critic of the current budget proposals:
Bank of Italy Governor Mario Draghi on Thursday criticized the Italian government's 2007 draft budget as relying too much on tax increases and too little on spending cuts to bring down the country's deficit.
"The net adjustments rely entirely on higher revenue," Draghi told a hearing of parliament's budget committee, adding the government's choices showed how difficult it was to cut spending in Italy. He said the maneuvers would pose problems in the medium- and long-term.
Now no one doubts Mario Draghi's determination to try and avoid further downgrades on Italy's debt, but as they saying goes "you and whose army Mario?". The gentlemen sitting in the committee room with him may be there to stop downgrades happening, but as they say, how many votes can they muster, this is the issue.
The danger is that we enter a logic where there is only one outcome. Certainly Draghi seems to be right that the budget is relying much more on trying to raise taxes than it is on addressing the need for long term structural reductions in spending programmes, several of which are set to rise and rise as Italy continues to age.
This is the opinion also of the Economist who in an article this week argue:
Its biggest reform, though, may be one taking place silently and without high-profile legislation: a clampdown on tax evasion. The government hopes that this will net more than €7 billion ($9 billion) next year. “The future of the country is at stake in the war on tax-dodging,” Mr Prodi said this week. “All else is secondary.”
That may seem absurdly hyperbolic. But the drive against tax dodging has a political significance that could outstrip its revenue-yielding capacity. In a country where the self-employed have traditionally declared a small fraction of their earnings, it is potentially powerfully redistributive. What really brought many of last week's protesting professionals out on the streets was the threat of having to pay taxes that employees cannot escape. Their ire helps to comfort the powerful left of Mr Prodi's heterogeneous administration, and may even give him enough leeway to pass other liberalising reforms.
Yet there are risks in all this. The most obvious is that the attack on tax evasion will be no more successful than previous crackdowns in getting Italians to start paying their taxes in full. But another risk is that, if it does work, it could induce the government to keep relying on higher tax revenues not spending cuts to sort out its public finances.
There is a great risk involved in the strategy, and that is that the revenue quite simply won't materialise as planned. Actually with the strong economic performance so far this year revenue has been notably robust, with taxes bringing in 18.5 billion more than was forecast earlier this year. There is no certainty however that in the conditions prevailing in 2007 this fortunate situation will be repeated, and if it isn't we will be back with Standard and Poor's and another review of Italy's credit rating, precisely the outcome which Mario Draghi wants to avoid. But as I say, how many deputies does Mario Draghi have in his party?
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?
Friday, October 20, 2006
Agreement On Severance Pay And Small Companies
Following the questioning of the 2007 budget proposal (and here) over severance pay and pension funds, the draft 2007 budget has now been amended so that businesses with fewer than 50 employees need not transfer severance pay to the state pension fund.
This debate seems to have two components: the one inside Italy itself - which relates to the financial burden on small companies which was posed by the original proposal - and the one being held at the EU commission and the ECB about how to treat this budget item. Really I think there is little doubt on the latter. As Moritz Kraemer, head of European sovereign ratings at S&P, says in the extract posted below "We would not consider this to be revenue". Nor do I think would anyone else. So the agreement resolves the first question, but not the second one, which is still how to bring the 2007 budget within the current guidlines of the EU Stability and Growth Pact.
Companies with more than 50 employees will have to transfer 100 percent of the severance pay to the state, according to an agreement reached late yesterday between the government, unions and businesses. The severance payments will bring in about 5 billion euros ($6.3 billion) to the pension fund.
The agreement caps almost seven years of debate over the so-called Tfr pay. Businesses often use severance pay they are required to withhold for employees as an inexpensive form of financing.
Standard & Poor's and Fitch Ratings both cut Italy's credit rating yesterday on concern Prodi's plan to reduce the government's debt and deficit doesn't go far enough. Moritz Kraemer, head of European sovereign ratings at S&P, yesterday said the severance transfer was a ``liability in the future.....We would not consider this to be revenue,'' Kraemer said on a conference call.
Employees working for a small company will have until June to decide whether their severance pay should go to either a private or state-run pension fund or remain within the company, Labor Minister Cesare Damiano said. The 23,000 companies in Italy that have 50 or more employees will automatically transfer the entire amount to the state fund, according to the agreement.
``The government predicts that about 37 percent of the Tfr in 2007 will end up in funds and the rest will end up in part self-financing the companies, and in part sustaining the state pension fund for investment in infrastructure,'' Damiano told la Repubblica in an interview published today.
This debate seems to have two components: the one inside Italy itself - which relates to the financial burden on small companies which was posed by the original proposal - and the one being held at the EU commission and the ECB about how to treat this budget item. Really I think there is little doubt on the latter. As Moritz Kraemer, head of European sovereign ratings at S&P, says in the extract posted below "We would not consider this to be revenue". Nor do I think would anyone else. So the agreement resolves the first question, but not the second one, which is still how to bring the 2007 budget within the current guidlines of the EU Stability and Growth Pact.
Companies with more than 50 employees will have to transfer 100 percent of the severance pay to the state, according to an agreement reached late yesterday between the government, unions and businesses. The severance payments will bring in about 5 billion euros ($6.3 billion) to the pension fund.
The agreement caps almost seven years of debate over the so-called Tfr pay. Businesses often use severance pay they are required to withhold for employees as an inexpensive form of financing.
Standard & Poor's and Fitch Ratings both cut Italy's credit rating yesterday on concern Prodi's plan to reduce the government's debt and deficit doesn't go far enough. Moritz Kraemer, head of European sovereign ratings at S&P, yesterday said the severance transfer was a ``liability in the future.....We would not consider this to be revenue,'' Kraemer said on a conference call.
Employees working for a small company will have until June to decide whether their severance pay should go to either a private or state-run pension fund or remain within the company, Labor Minister Cesare Damiano said. The 23,000 companies in Italy that have 50 or more employees will automatically transfer the entire amount to the state fund, according to the agreement.
``The government predicts that about 37 percent of the Tfr in 2007 will end up in funds and the rest will end up in part self-financing the companies, and in part sustaining the state pension fund for investment in infrastructure,'' Damiano told la Repubblica in an interview published today.
Thursday, October 19, 2006
S&P's and Fitch Cut Italy's Credit Rating
Well ,since Romano Prodi is quoted as saying that "today's downgrade of Italy's credit rating by Fitch Ratings to AA-, from AA, was fully expected". I suppose there is nothing to worry about, everything is under control, now isn't it:
Italy's credit rating was lowered by Standard & Poor's and Fitch Ratings, a blow for Prime Minister Romano Prodi who pledged to trim the government's debt and deficit to defend the nation's creditworthiness.
S&P today cut Italy's rating to A+, the second-lowest of the dozen nations using the euro after Greece, saying his budget plan doesn't do enough to cut spending. Fitch trimmed to AA- from AA. The decision comes at a time rising European interest rates are raising financing costs and sent Italy's bonds lower.
``Ironically, to the extent that it raises Italy's borrowing costs, the downgrade makes it more difficult to reduce the debt and deficit,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.
Prodi, in office in May, had tried to stave off a rating cut with a draft budget that includes 34.7 billion euros ($43.5 billion) in spending reductions and revenue-raising measures. Prodi said the plan would bring the deficit back within European Union limits and lower the EU's biggest debt, currently worth almost 1.1 times Italy's $1.8 trillion gross domestic product.
The nation's debt ranks third in the world behind Japan with $6.4 trillion of sovereign marketable securities and the U.S. with $4.2 trillion of Treasury bonds and bills.
In a way Prodi is right, there is nothing especially starling, or even surprising about this decision, indeed the whole thing does have a smack of inevitability about it. What will the downgrade mean? Well in the short run not a lot. What are called spreads (the differential between the effective interest rate sellers of Itaian bonds have to offer when compared with German ones) have of course widened, but this is relatively small beer:
The spread of Italy's benchmark 10-year government bond yields widened compared to the German bund equivalent, after Fitch and Standard & Poor's downgraded Italy's debt ratings, market sources said.
Italy's 10-year bond yield premium widened to 28.2 basis points following the S&P downgrade, after widening to 27.8 on the earlier Fitch downgrade. It opened this morning at 26.5, they said.
Methinks Prodi is just a touch too cynical in saying this was entirely expected since S&P's explicitly stated that said the budget doesn't do enough to cut spending and relies too much on growing tax revenue to lower the deficit.Is he really saying that his inability to draw up a budget which was up to the demands of the situation was also forseeable back in May. Perhaps it was, but he shouldn't be the one to be saying this.
On another reading this downgrade can work to Prodi's advantage:
``Developments will now heavily depend on whether Prime Minister will decide to leverage on the downgrade to re-balance the budget, risking a clash with the radical left wing of the coalition, which will strenuously defend the current draft version,'' said Paolo Pizzoli, an economist a ING Bank NV in Milan.
Prodi said in an e-mailed statement that he had shared the same concerns that Fitch expressed in its note when he took over Italy's finances after winning elections in April.
``We are certain that the next judgments, the ones that will take into account this government's economic policy and not the policy left behind by the previous government, will register positively,'' Prodi said.
Fitch praised the government's ``commitment to fiscal responsibility,'' but added the administration will ``find it hard to implement the tough fiscal reforms necessary'' to raise the primary surplus enough to curb debt. S&P was more critical of the spending plan, saying ``the budget bill does little to drive forward on meaningful supply-side reforms, and will actually lead to net increases in spending as a share of GDP, instead of curtailing high current expenditure, which is the root cause of Italy's fiscal imbalance.''
I am however less than entirely convinced that a downgrade from a couple of ratings agencies will do much to convince a voting public who are not already convinced by the possibility that their pension funds could become insolvent.
At the end of the day all of this is playing with fire. The problem isn't this downgrade (which may or may not have been already factored in). The problem is the danger of a subsequent one, and what the ECB may then be forced to do if this happens. As I argue here, and Nouriel Roubini suggests here, playing chicken is a dangerous game. The ECB has explicitly stated that it will not accept government paper (bonds) in the future from any country which has not maintained at least an A- rating from one or more of the principal debt assesment agencies. Well, Italy is now at AA-.
Italy's credit rating was lowered by Standard & Poor's and Fitch Ratings, a blow for Prime Minister Romano Prodi who pledged to trim the government's debt and deficit to defend the nation's creditworthiness.
S&P today cut Italy's rating to A+, the second-lowest of the dozen nations using the euro after Greece, saying his budget plan doesn't do enough to cut spending. Fitch trimmed to AA- from AA. The decision comes at a time rising European interest rates are raising financing costs and sent Italy's bonds lower.
``Ironically, to the extent that it raises Italy's borrowing costs, the downgrade makes it more difficult to reduce the debt and deficit,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.
Prodi, in office in May, had tried to stave off a rating cut with a draft budget that includes 34.7 billion euros ($43.5 billion) in spending reductions and revenue-raising measures. Prodi said the plan would bring the deficit back within European Union limits and lower the EU's biggest debt, currently worth almost 1.1 times Italy's $1.8 trillion gross domestic product.
The nation's debt ranks third in the world behind Japan with $6.4 trillion of sovereign marketable securities and the U.S. with $4.2 trillion of Treasury bonds and bills.
In a way Prodi is right, there is nothing especially starling, or even surprising about this decision, indeed the whole thing does have a smack of inevitability about it. What will the downgrade mean? Well in the short run not a lot. What are called spreads (the differential between the effective interest rate sellers of Itaian bonds have to offer when compared with German ones) have of course widened, but this is relatively small beer:
The spread of Italy's benchmark 10-year government bond yields widened compared to the German bund equivalent, after Fitch and Standard & Poor's downgraded Italy's debt ratings, market sources said.
Italy's 10-year bond yield premium widened to 28.2 basis points following the S&P downgrade, after widening to 27.8 on the earlier Fitch downgrade. It opened this morning at 26.5, they said.
Methinks Prodi is just a touch too cynical in saying this was entirely expected since S&P's explicitly stated that said the budget doesn't do enough to cut spending and relies too much on growing tax revenue to lower the deficit.Is he really saying that his inability to draw up a budget which was up to the demands of the situation was also forseeable back in May. Perhaps it was, but he shouldn't be the one to be saying this.
On another reading this downgrade can work to Prodi's advantage:
``Developments will now heavily depend on whether Prime Minister will decide to leverage on the downgrade to re-balance the budget, risking a clash with the radical left wing of the coalition, which will strenuously defend the current draft version,'' said Paolo Pizzoli, an economist a ING Bank NV in Milan.
Prodi said in an e-mailed statement that he had shared the same concerns that Fitch expressed in its note when he took over Italy's finances after winning elections in April.
``We are certain that the next judgments, the ones that will take into account this government's economic policy and not the policy left behind by the previous government, will register positively,'' Prodi said.
Fitch praised the government's ``commitment to fiscal responsibility,'' but added the administration will ``find it hard to implement the tough fiscal reforms necessary'' to raise the primary surplus enough to curb debt. S&P was more critical of the spending plan, saying ``the budget bill does little to drive forward on meaningful supply-side reforms, and will actually lead to net increases in spending as a share of GDP, instead of curtailing high current expenditure, which is the root cause of Italy's fiscal imbalance.''
I am however less than entirely convinced that a downgrade from a couple of ratings agencies will do much to convince a voting public who are not already convinced by the possibility that their pension funds could become insolvent.
At the end of the day all of this is playing with fire. The problem isn't this downgrade (which may or may not have been already factored in). The problem is the danger of a subsequent one, and what the ECB may then be forced to do if this happens. As I argue here, and Nouriel Roubini suggests here, playing chicken is a dangerous game. The ECB has explicitly stated that it will not accept government paper (bonds) in the future from any country which has not maintained at least an A- rating from one or more of the principal debt assesment agencies. Well, Italy is now at AA-.
ISAE Forecast 2007
Well, since Paris suggests I never post any good news about Italy I would like to draw attention to the fact that Italy's National Institute for the Study and Analysis on the Economy (ISAE) has just published it's 2006/2007 forecast for the Italian Economy (careful PDF). This follows the quadro mocroeconomico 2007-2009 published on 11 October (again PDF, thanks Vittorio). The basic picture is summarised as follows:
Italy GDP to slow down in 2007, partly due to austerity measures - ISAE
Italy's GDP growth is expected to slow down in 2007 from 2006, due to government austerity measures to limit the public deficit and general economic weakness in the euro-zone, according to research institute ISAE. ISAE forecast GDP growth to be 1.8 pct this year, adjusted to the number of working days, falling to 1.3 pct in 2007. Gross GDP growth is seen at 1.7 pct in 2006 and 1.4 pct in 2007, it said. The research institute expects the public deficit to be 4.6 pct of GDP this year and 2.7 pct the next, beating the government's forecast of a 4.8 pct deficit in 2006 and a 2.8 pct deficit in 2007. ISAE forecast inflation dropping from 2.2 pct this year to 2.0 pct in 2007, thanks to declining oil prices.
A number of things are worth noting. In the first place the expectation that the Italian economy will slow somewhat next year, from an estimated growth rate of 1.7/1.8% in 2006 to one of 1.3/1.4% in 2007. The reasons given for the slowdown are the impact of the fiscal correction in Italy, and in the Eurozone (which is envisioned as slowing from 2006s projected 2.7% to 2% in 2007) and a slowdown in the US (which is expected to slow from 3.3% this year to 2.3% next year).
My feeling is that these numbers may be rather on the high side for the entire eurozone, but not extravagantly so. A lot of course depends on how this growth is distributed across the year, or put another way, on how quickly the German economy slows.
On the bigger story I still feel that these kind of projections (which are pretty typical of what is on offer at present) may well be reading things back to front. Both the German and Japanese economies are now slowing significantly, but what will decide whether there is a recession in these countries in 2007 really rather depends on what happens in developing countries like India and China. If these sustain momentum, then export demand may well serve to keep Germany and Japan afloat. (All this is argued in much greater depth in the Indian context in this post, and this one, and especially the comments).
On the deficit the ISAE forecast is for a defict in 2006 of 4.6% of GDP (which reduces to 3.4% of GDP if the recent VAT decision is allowable), and for 2007 the deficit is expected to fall to 2.7% of GDP, depending, of course, on the final details of the budget.
In conclusion I would just highligh a few points from the report:
"L’accelerazione delle vendite all’estero ha beneficiato dell’irrobustimento della congiuntura europea, in particolare tedesca; si sono intensificate, nella prima parte del 2006, anche le esportazioni verso la Cina, soprattutto di beni della meccanica strumentale."
So what we see here is the pattern in Germany and Japan being repeated to some extent, with Italy being pulled in the China-German train, with, of course, machinery and equipment to China playing a significant part in the story. Now Germany, as we know, is about to slow, but what about China, this is the big unknown. My guess is that the Chinese show will run through to the Olympics in 2008, but it is just that, a guess. There is no sign of any big slowdown there at this point.
"Alla maggiore vivacità del ciclo economico si è accompagnato, nei primi sei mesi di quest’anno, un significativo miglioramento delle condizioni del mercato del lavoro, in termini sia del numero di individui che dichiarano di avere un impiego nella rilevazione trimestrale ISTAT sulle forze di lavoro"
The picture in Italy is quite similar to that in Japan, there is a significant labour market tightening, but this is not necessarily due to the rate of economic growth so much as the fact that the labour force is ageing and potentially reducing. Germany is the odd one out here, since despite having the conditions to experience labour market tightening, the tax wedge and the relatively generous benefits levels make it difficult to make a dent in the level of unemployment.
Italy GDP to slow down in 2007, partly due to austerity measures - ISAE
Italy's GDP growth is expected to slow down in 2007 from 2006, due to government austerity measures to limit the public deficit and general economic weakness in the euro-zone, according to research institute ISAE. ISAE forecast GDP growth to be 1.8 pct this year, adjusted to the number of working days, falling to 1.3 pct in 2007. Gross GDP growth is seen at 1.7 pct in 2006 and 1.4 pct in 2007, it said. The research institute expects the public deficit to be 4.6 pct of GDP this year and 2.7 pct the next, beating the government's forecast of a 4.8 pct deficit in 2006 and a 2.8 pct deficit in 2007. ISAE forecast inflation dropping from 2.2 pct this year to 2.0 pct in 2007, thanks to declining oil prices.
A number of things are worth noting. In the first place the expectation that the Italian economy will slow somewhat next year, from an estimated growth rate of 1.7/1.8% in 2006 to one of 1.3/1.4% in 2007. The reasons given for the slowdown are the impact of the fiscal correction in Italy, and in the Eurozone (which is envisioned as slowing from 2006s projected 2.7% to 2% in 2007) and a slowdown in the US (which is expected to slow from 3.3% this year to 2.3% next year).
My feeling is that these numbers may be rather on the high side for the entire eurozone, but not extravagantly so. A lot of course depends on how this growth is distributed across the year, or put another way, on how quickly the German economy slows.
On the bigger story I still feel that these kind of projections (which are pretty typical of what is on offer at present) may well be reading things back to front. Both the German and Japanese economies are now slowing significantly, but what will decide whether there is a recession in these countries in 2007 really rather depends on what happens in developing countries like India and China. If these sustain momentum, then export demand may well serve to keep Germany and Japan afloat. (All this is argued in much greater depth in the Indian context in this post, and this one, and especially the comments).
On the deficit the ISAE forecast is for a defict in 2006 of 4.6% of GDP (which reduces to 3.4% of GDP if the recent VAT decision is allowable), and for 2007 the deficit is expected to fall to 2.7% of GDP, depending, of course, on the final details of the budget.
In conclusion I would just highligh a few points from the report:
"L’accelerazione delle vendite all’estero ha beneficiato dell’irrobustimento della congiuntura europea, in particolare tedesca; si sono intensificate, nella prima parte del 2006, anche le esportazioni verso la Cina, soprattutto di beni della meccanica strumentale."
So what we see here is the pattern in Germany and Japan being repeated to some extent, with Italy being pulled in the China-German train, with, of course, machinery and equipment to China playing a significant part in the story. Now Germany, as we know, is about to slow, but what about China, this is the big unknown. My guess is that the Chinese show will run through to the Olympics in 2008, but it is just that, a guess. There is no sign of any big slowdown there at this point.
"Alla maggiore vivacità del ciclo economico si è accompagnato, nei primi sei mesi di quest’anno, un significativo miglioramento delle condizioni del mercato del lavoro, in termini sia del numero di individui che dichiarano di avere un impiego nella rilevazione trimestrale ISTAT sulle forze di lavoro"
The picture in Italy is quite similar to that in Japan, there is a significant labour market tightening, but this is not necessarily due to the rate of economic growth so much as the fact that the labour force is ageing and potentially reducing. Germany is the odd one out here, since despite having the conditions to experience labour market tightening, the tax wedge and the relatively generous benefits levels make it difficult to make a dent in the level of unemployment.
Wednesday, October 18, 2006
Prodi's Rating Slips
I am not particularly a political commentator, but I think that politics is such a basic part of macroeconomics in Italy that it is hard not to follow political events closely, so I am not exactly sent over the moon by the news that Romano Prodi's popularity rating seems to be waning (already) and doubly not when I discover that at the same time Massimo D'Alema has consolidated his poition as the most popular member of the Italian cabinet. When we think about the tough decision and tough reforms which lie ahead this certainly doesn't seem to be the most promising of starts. Anyone else got anything to add?
Prime Minister Romano Prodi's popularity among voters has slipped six months after winning the most tightly contested elections in modern Italian history, according to a poll by IPR Marketing.
The number of Italians that ``have faith'' in Prodi as the country's leader has dropped to 49 percent from 53 percent in September and 58 percent in July, IPR said. The Rome-based pollster surveyed 1,000 adults on Oct. 16. The previous two surveys were carried out Sept. 13 and July 12 respectively. No margin of error was given.
Massimo D'Alema, the foreign minister, is the most popular member of Prodi's cabinet, followed in joint second place by Antonio Di Pietro, the former prosecutor turned minister for public works, and Giovanna Melandri, who heads the newly created ministry of sport, the poll showed.
Prime Minister Romano Prodi's popularity among voters has slipped six months after winning the most tightly contested elections in modern Italian history, according to a poll by IPR Marketing.
The number of Italians that ``have faith'' in Prodi as the country's leader has dropped to 49 percent from 53 percent in September and 58 percent in July, IPR said. The Rome-based pollster surveyed 1,000 adults on Oct. 16. The previous two surveys were carried out Sept. 13 and July 12 respectively. No margin of error was given.
Massimo D'Alema, the foreign minister, is the most popular member of Prodi's cabinet, followed in joint second place by Antonio Di Pietro, the former prosecutor turned minister for public works, and Giovanna Melandri, who heads the newly created ministry of sport, the poll showed.
Tuesday, October 17, 2006
Much Ado About Ageing?
One of the rationales behind this blog, and I make no bones about it, is that Italy is an important case for a phenomenon which has global significance: that phenomenon is known as the demographic transition. Barely a week ago Federal Reserve Chairman Bernanke made a major speech about just this topic. The whole speech is worth a read, but the heart of the matter is this:
This coming demographic transition is the result both of the reduction in fertility that followed the post-World War II baby boom and of ongoing increases in life expectancy. Although demographers expect U.S. fertility rates to remain close to current levels for the foreseeable future, life expectancy is projected to continue rising. As a consequence, the anticipated increase in the share of the population aged sixty-five or older is not simply the result of the retirement of the baby boomers; the "pig in a python" image often used to describe the effects of that generation on U.S. demographics is misleading. Instead, over the next few decades the U.S. population is expected to become progressively older and remain so, even as the baby-boom generation passes from the scene.
Now Bernake is talking here about the case of the United States, but the issue is far more generalisable, and note what he says: "over the next few decades the U.S. population is expected to become progressively older". Bernanke is talking about the *population* here (ie median ages) and where he says 'remain so' he could just have easily said and 'will continue to do so', since this process has, at the present time, no end point. Median ages are rising and will continue to rise so long as life expectancy continues to increase. And which are the three countires with the highest median ages to date: why Italy, Germany and Japan (please consult the full list of countries, to ger a clearer picture).
So we are in the throes of a transition, and this transition will, as Claus Vistesen suggests, have important economic consequences, and I think anyone trying to argue the contrary needs to measure their words very carefully.
So the first point I want to make is that I didn't especially chose Italy, Italy chose itself, since according to the UN 2002 population forcecast Italy is set - over the next decade or so - to become the oldest country on the planet in terms of median age.
Now why do countries get older? Well in the first place this ageing process is due to a drop in fertility to below replacement level, and in the second place it is a result of a continuing increase in life expectancy. The drop in fertility narrows the base of the population pyramid, while the increase in life expectancy elongates the upper end.
Now why is this economically important? Well in the first and most obvious instance because of the shift in dependency ratios. Countries with rapidy increasing life expectancy and lowest low fertility (below 1.5 tfr) face the prospect of not only a decreasing proportion of the population working, but also of an eventual decline in the absolute numbers of the working population, and this as the number of elderly dependents increases both absolutely and as a proportion of the total population. So this is why government income and expenditure becomes important, because at the end of the day all of this has to be paid for, and if you run up substantial deficits during the relatively good times, then how are you going to sustain the more difficult burden which lies ahead? This is the heart of the issue.
Of course there are many details to this picture, and that is why a group of us set up a special blog devoted entirely to the theoretical issues posed by this transition.
Now Paris argues: "demographers have a fairly poor track record. First they told us that we should worry about over-population (in the 1970s) and now they tell us the problem is the declinding birth rate and the aging population."
Actually this is not so inconsistent as it seems. In the first place countries with high birthrates like Mali, Senegal, Niger etc, do have a problem, they have far too many children, and their economies cannot get off the ground. So those demographers who said that it was a priority to get birth rates down were right, but the problem is they have now come down so far in most developed countires that populations are not reproducing themselves. And this is the issue we must address.
Personally I now think there is some sort of inevitability about low fertility, that it has a perfectly comprehensible economic rationale in terms of trading quality for quantity in children, and that the pattern is now so general (see this list) that trying to raise fertility is a bit like trying to make the oceans go back, I don't think it is doable. Of course fertility in Italy is not as low as it seems (since there is a statistical postponement effect as well as a real quantity one) and we should expect some sort of rebound, but the true number is well below replacement.
My main beef with Paris's 'everything is just fine in Italy' take, and with the 'demographers get everything wrong' part, is that people have been saying this for a long, long time, but if back in the early 90s there had been a real child friendly policy in Italy - this would have been worth investing some of that enormous government debt in - then instead of fertility around the 1.3 mark, it might now have been around the 1.7 one. Also a lot could have been done to make the education system more efficient and the labour market more effective for young women entrants, so that instead of postponing childbirth to 35 they could have been having their firts child at 27 or 28 and again that would have made a big difference.
But we now have what we have, and in the significant time horizon fertility isn't going to change sufficiently to make any meaningful difference to the outcome.
Another area of effective policy would be extending the working life upwards, but many people in Italy are still retiring at 60. In the US the decision to increase orking life up to 67 was taken long ago, 25% of the Japanese population are now working at 75, in Germany they have decided to increase the age to 67, and in the UK they are talking about it, but what is Italy doing, would somebody please tell me, since this is far from obvious.
Finally, there is immigration. This of course can help to improve the pyramid structure and as such is welcome. But it wasn't so long ago that senior Italian politicians were threatening to shoot boatloads of immigrants out of the sea. So the change of heart in Italy on immigration is a welcome move, and the Prodi proposal to simplify nationality acquisition is again a move in the right direction, but one more time we are back with the fact that to attract migrants you need jobs, and to have jobs you need growth, and this growth is precisely what has been lacking in Italy over the last decade or so (more on this in another post).
So the point is, there are things which can be done, and they are pretty urgent, but simply saying 'problem, what problem', 'no problem here' won't do anything to make it easier to address all of this.
This coming demographic transition is the result both of the reduction in fertility that followed the post-World War II baby boom and of ongoing increases in life expectancy. Although demographers expect U.S. fertility rates to remain close to current levels for the foreseeable future, life expectancy is projected to continue rising. As a consequence, the anticipated increase in the share of the population aged sixty-five or older is not simply the result of the retirement of the baby boomers; the "pig in a python" image often used to describe the effects of that generation on U.S. demographics is misleading. Instead, over the next few decades the U.S. population is expected to become progressively older and remain so, even as the baby-boom generation passes from the scene.
Now Bernake is talking here about the case of the United States, but the issue is far more generalisable, and note what he says: "over the next few decades the U.S. population is expected to become progressively older". Bernanke is talking about the *population* here (ie median ages) and where he says 'remain so' he could just have easily said and 'will continue to do so', since this process has, at the present time, no end point. Median ages are rising and will continue to rise so long as life expectancy continues to increase. And which are the three countires with the highest median ages to date: why Italy, Germany and Japan (please consult the full list of countries, to ger a clearer picture).
So we are in the throes of a transition, and this transition will, as Claus Vistesen suggests, have important economic consequences, and I think anyone trying to argue the contrary needs to measure their words very carefully.
So the first point I want to make is that I didn't especially chose Italy, Italy chose itself, since according to the UN 2002 population forcecast Italy is set - over the next decade or so - to become the oldest country on the planet in terms of median age.
Now why do countries get older? Well in the first place this ageing process is due to a drop in fertility to below replacement level, and in the second place it is a result of a continuing increase in life expectancy. The drop in fertility narrows the base of the population pyramid, while the increase in life expectancy elongates the upper end.
Now why is this economically important? Well in the first and most obvious instance because of the shift in dependency ratios. Countries with rapidy increasing life expectancy and lowest low fertility (below 1.5 tfr) face the prospect of not only a decreasing proportion of the population working, but also of an eventual decline in the absolute numbers of the working population, and this as the number of elderly dependents increases both absolutely and as a proportion of the total population. So this is why government income and expenditure becomes important, because at the end of the day all of this has to be paid for, and if you run up substantial deficits during the relatively good times, then how are you going to sustain the more difficult burden which lies ahead? This is the heart of the issue.
Of course there are many details to this picture, and that is why a group of us set up a special blog devoted entirely to the theoretical issues posed by this transition.
Now Paris argues: "demographers have a fairly poor track record. First they told us that we should worry about over-population (in the 1970s) and now they tell us the problem is the declinding birth rate and the aging population."
Actually this is not so inconsistent as it seems. In the first place countries with high birthrates like Mali, Senegal, Niger etc, do have a problem, they have far too many children, and their economies cannot get off the ground. So those demographers who said that it was a priority to get birth rates down were right, but the problem is they have now come down so far in most developed countires that populations are not reproducing themselves. And this is the issue we must address.
Personally I now think there is some sort of inevitability about low fertility, that it has a perfectly comprehensible economic rationale in terms of trading quality for quantity in children, and that the pattern is now so general (see this list) that trying to raise fertility is a bit like trying to make the oceans go back, I don't think it is doable. Of course fertility in Italy is not as low as it seems (since there is a statistical postponement effect as well as a real quantity one) and we should expect some sort of rebound, but the true number is well below replacement.
My main beef with Paris's 'everything is just fine in Italy' take, and with the 'demographers get everything wrong' part, is that people have been saying this for a long, long time, but if back in the early 90s there had been a real child friendly policy in Italy - this would have been worth investing some of that enormous government debt in - then instead of fertility around the 1.3 mark, it might now have been around the 1.7 one. Also a lot could have been done to make the education system more efficient and the labour market more effective for young women entrants, so that instead of postponing childbirth to 35 they could have been having their firts child at 27 or 28 and again that would have made a big difference.
But we now have what we have, and in the significant time horizon fertility isn't going to change sufficiently to make any meaningful difference to the outcome.
Another area of effective policy would be extending the working life upwards, but many people in Italy are still retiring at 60. In the US the decision to increase orking life up to 67 was taken long ago, 25% of the Japanese population are now working at 75, in Germany they have decided to increase the age to 67, and in the UK they are talking about it, but what is Italy doing, would somebody please tell me, since this is far from obvious.
Finally, there is immigration. This of course can help to improve the pyramid structure and as such is welcome. But it wasn't so long ago that senior Italian politicians were threatening to shoot boatloads of immigrants out of the sea. So the change of heart in Italy on immigration is a welcome move, and the Prodi proposal to simplify nationality acquisition is again a move in the right direction, but one more time we are back with the fact that to attract migrants you need jobs, and to have jobs you need growth, and this growth is precisely what has been lacking in Italy over the last decade or so (more on this in another post).
So the point is, there are things which can be done, and they are pretty urgent, but simply saying 'problem, what problem', 'no problem here' won't do anything to make it easier to address all of this.
Sunday, October 15, 2006
Fiat And Industrial Output
Paris raises in the comments section (Italian link) the recent strong performance from Fiat in the car sector:
Fiat SpA, Italy's best performing stock, increased its sales in Europe by 15 percent in September, the fastest growth among the major manufacturers, while the overall market fell by 2.6 percent.
Fiat sales, including the Lancia, Alfa Romeo, Ferrari and Maserati marques, rose to 94,540 cars in September from 82,462 a year earlier, thanks to the Fiat brand, whose sales jumped 19 percent, the Brussels-based Association of European Automobile Manufacturers said in an e-mailed statement today. Fiat group nine-month sales grew 18 percent to 893,240 cars, compared with a European average of 0.1 percent growth.
``Fiat is for sure doing very well under an industrial point of view. In this moment, it is the best carmaker in Europe for growth potential,'' said Gianpaolo Rivano, who manages about 200 million euros ($251 million) at Gesti-Re SGR SpA in Milan.
Indeed the rise in September sales (remember that confidence index) was particularly spectacular:
Fiat's September sales in Italy grew 5.9 percent, helped to growing demand for Grande Punto and Panda models, the two best- selling cars in the country, the Ministry of Transportation said on Oct. 2. Combined sales at Fiat brands advanced to 55,907 vehicles from 52,772 cars.
This progress is even more astonishing, since as Paola points out in comments, the European car market is in a very sorry state:
Renault SA and General Motors Corp., suffering from a lack of popular new models, led the fourth monthly decline in European car sales in September as fuel prices rose.
Sales decreased 2.6 percent from a year earlier to 1.41 million vehicles, the Brussels-based Association of European Automobile Manufacturers said in a statement today. Nine-month sales inched up 0.1 percent to 11.8 million vehicles......
``The big markets worldwide, which includes Europe of course, are saturated and largely stagnant,'' said Robert Heberger, an analyst at Merck Finck in Munich. ``Unemployment and higher fuel prices are playing a role as well as the fact that the French carmakers' products and GM's to some extent have aged.''
So the first thing to note is that Fiat have some good new models, and they are gaining, at least in the short term, market share. Questions however remain:
i) What kind of offers were Fiat making to get these results? This is a straight question, since I simply don't know, so can anyone fill this in. Obviously it is one thing to get sales, and another to get profitable sales, as we have seen with Ford and GM in the US in recent years (and we have also seen the monthly volatility which goes with the 'offers' season).
ii) Where are the components for these cars being made (indeed where is the assembly being done?). If all of this is still happening in Turin then the news isn't anything like as promising as it might be. Basically this thought relates to a point Sebastian Dullian is making on Eurozone watch blog about how, while unit labour costs in Italy are rising, they are not rising anything like as fast as they are in Spain.
Now as Paris often kindly points out I am not based in Italy, but in Catalonia, Spain. So I am in a position to make some sort of comparison here. Basically Catalonia was the industrial centre of Spain (together with the Basque Country) during the industrial age. But ongoing inflation and generally rising living standards mean that Spain is no longer at all competitive in many of the industrial sectors, and in particular the automotive one. Catalonia used to boast one of the largest concentrations of car component manufacture in Europe, but those days are now long gone. Most of the component companies were, like their Italian equivalents, small family type businesses, and these have now largely migrated to Eastern Europe, and even assembly itself is only hanging on by a thread since the Spanish government pays to keep it going (a luxury which may or may not be advisable, but which the Spanish government is in a much better position than the Italian one to permit itself since the budget is in surplus and the debt to GDP ratio is well within the EU guidlines).
So the question is, how effectively is Fiat leveraging outsourcing in Eastern Europe, and to what extent is this increase in output being achieved by retaining low paying employment in Italy?
Paola also raises two more interesting questions: the degree to which the recent increase in industrial production has been a Fiat story, and to what extent is this increase sustainable in the future (ie won't the competitors respond?). Thus Paola:
Paris is right; there has been an increase in Italian Industrial Output. I went to look closely at the statistical data for the period Aug 2005 - August 2006 and the comparisons between Period January-August 2006 and January-August 2005. My feeling is that the growth is largely due to one company's performance: FIAT, the largest company in Italy. Not surprisingly, given that their revenues and market share have grown steadily in the last year. In spite of some fluctuations, the change in output of other sectors average out to a minimal increase in total industrial output. If I am correct with this analysis, then the next questions to ask are: Why Fiat is performing so well, while the automobile industry is stagnant? And Is FIAT performance sustainable in the future? Lastly, will a superior performance in one industrial sector be enough to push the whole economy also in the future, in order to account for growth in macroeconomics models? I do not know the answer for any of these questions, but I will try to give my opinion about the first one. Fiat, in my eyes, has recently changed management, acquired a fresher look and launched some new models that have better quality than they used to have. The company has realized that Europeans would not buy low quality cars at average prices unless they do not have any other choice, that the Italian Government would not rush to save the company's finances any more (better start selling people what they want!), and that nowadays marketing is an important Department... All this while some competitors (such as the Peugot case reported by the Bloomberg article) are sleeping and have lost market share in Europe.
Update: Well to some extent I have answered my own question, since this article from Polish radio explains the strong performance being achieved in the Tychy plant:
Fiat, Poland’s traditional market leader has maintained its lead in the assembly of new cars. Fiat officials say that three shifts are working 6 days a week at their factory in Tychy in the South, to satisfy West European orders.
And of course the link Paris supplied shows workers at the Melfi plant in Southern Italy.
Also amid all the cheering lets not forget this:
"In Western Europe, new-car sales only increased in Germany, by 4.5 percent, as Europe's largest economy — and second-biggest car buyer — finally went shopping after years of little growth. Car sales dropped 13.3 percent in France, Europe's fourth-largest car market, and by 3.2 percent in Italy. Britain, the biggest purchaser of new cars, saw sales fall just 0.7 percent to 413,991. (September data)"
Now this is important since the extra sales in Germany undoubtedly have some relation to the forthcoming 3% VAT increase, which means that in any rigourous accounting exercise part of them should be counted against 2007, since purchases brought forward will mean less sales to come.
or this:
Italy's Fiat SpA saw sales surge 14.9 percent compared with a year ago. Its core Fiat and luxury Alfa Romeo cars proved more popular, although Lancia sales were down. The company ended 17 successive quarterly losses by reporting higher profits in the final quarter of last year.
Update 2: Paris has kindly found us a link in English on the Fiat turnaround.(Hat-tip FxTalks). The results are obviously impressive, and more impressive I admit than I initially appreciated. Fiat is obviously on the attack again after some very bad years, and seems to be leveraging some substantial productivity improvements, as well as having some obviously popular design ideas.
It would now be interesting to see this spreading across more sectors. However, unfortunately, we are far from out of the woods yet. If we look at the other 'elderly' economies, Japan and German, both have been able to introduce substantial reforms to make their most competitive companies even more competitive, so much so that they are obviously now far more efficient than all but the best US companies. This however does not solve their outsanding macro problem which is how to generate additional internal demand, increase their tax base, and be able to sustain their welfare services. Having globally succesful companies just isn't enough I'm afraid. This nut is a hard one to crack.
Fiat SpA, Italy's best performing stock, increased its sales in Europe by 15 percent in September, the fastest growth among the major manufacturers, while the overall market fell by 2.6 percent.
Fiat sales, including the Lancia, Alfa Romeo, Ferrari and Maserati marques, rose to 94,540 cars in September from 82,462 a year earlier, thanks to the Fiat brand, whose sales jumped 19 percent, the Brussels-based Association of European Automobile Manufacturers said in an e-mailed statement today. Fiat group nine-month sales grew 18 percent to 893,240 cars, compared with a European average of 0.1 percent growth.
``Fiat is for sure doing very well under an industrial point of view. In this moment, it is the best carmaker in Europe for growth potential,'' said Gianpaolo Rivano, who manages about 200 million euros ($251 million) at Gesti-Re SGR SpA in Milan.
Indeed the rise in September sales (remember that confidence index) was particularly spectacular:
Fiat's September sales in Italy grew 5.9 percent, helped to growing demand for Grande Punto and Panda models, the two best- selling cars in the country, the Ministry of Transportation said on Oct. 2. Combined sales at Fiat brands advanced to 55,907 vehicles from 52,772 cars.
This progress is even more astonishing, since as Paola points out in comments, the European car market is in a very sorry state:
Renault SA and General Motors Corp., suffering from a lack of popular new models, led the fourth monthly decline in European car sales in September as fuel prices rose.
Sales decreased 2.6 percent from a year earlier to 1.41 million vehicles, the Brussels-based Association of European Automobile Manufacturers said in a statement today. Nine-month sales inched up 0.1 percent to 11.8 million vehicles......
``The big markets worldwide, which includes Europe of course, are saturated and largely stagnant,'' said Robert Heberger, an analyst at Merck Finck in Munich. ``Unemployment and higher fuel prices are playing a role as well as the fact that the French carmakers' products and GM's to some extent have aged.''
So the first thing to note is that Fiat have some good new models, and they are gaining, at least in the short term, market share. Questions however remain:
i) What kind of offers were Fiat making to get these results? This is a straight question, since I simply don't know, so can anyone fill this in. Obviously it is one thing to get sales, and another to get profitable sales, as we have seen with Ford and GM in the US in recent years (and we have also seen the monthly volatility which goes with the 'offers' season).
ii) Where are the components for these cars being made (indeed where is the assembly being done?). If all of this is still happening in Turin then the news isn't anything like as promising as it might be. Basically this thought relates to a point Sebastian Dullian is making on Eurozone watch blog about how, while unit labour costs in Italy are rising, they are not rising anything like as fast as they are in Spain.
Now as Paris often kindly points out I am not based in Italy, but in Catalonia, Spain. So I am in a position to make some sort of comparison here. Basically Catalonia was the industrial centre of Spain (together with the Basque Country) during the industrial age. But ongoing inflation and generally rising living standards mean that Spain is no longer at all competitive in many of the industrial sectors, and in particular the automotive one. Catalonia used to boast one of the largest concentrations of car component manufacture in Europe, but those days are now long gone. Most of the component companies were, like their Italian equivalents, small family type businesses, and these have now largely migrated to Eastern Europe, and even assembly itself is only hanging on by a thread since the Spanish government pays to keep it going (a luxury which may or may not be advisable, but which the Spanish government is in a much better position than the Italian one to permit itself since the budget is in surplus and the debt to GDP ratio is well within the EU guidlines).
So the question is, how effectively is Fiat leveraging outsourcing in Eastern Europe, and to what extent is this increase in output being achieved by retaining low paying employment in Italy?
Paola also raises two more interesting questions: the degree to which the recent increase in industrial production has been a Fiat story, and to what extent is this increase sustainable in the future (ie won't the competitors respond?). Thus Paola:
Paris is right; there has been an increase in Italian Industrial Output. I went to look closely at the statistical data for the period Aug 2005 - August 2006 and the comparisons between Period January-August 2006 and January-August 2005. My feeling is that the growth is largely due to one company's performance: FIAT, the largest company in Italy. Not surprisingly, given that their revenues and market share have grown steadily in the last year. In spite of some fluctuations, the change in output of other sectors average out to a minimal increase in total industrial output. If I am correct with this analysis, then the next questions to ask are: Why Fiat is performing so well, while the automobile industry is stagnant? And Is FIAT performance sustainable in the future? Lastly, will a superior performance in one industrial sector be enough to push the whole economy also in the future, in order to account for growth in macroeconomics models? I do not know the answer for any of these questions, but I will try to give my opinion about the first one. Fiat, in my eyes, has recently changed management, acquired a fresher look and launched some new models that have better quality than they used to have. The company has realized that Europeans would not buy low quality cars at average prices unless they do not have any other choice, that the Italian Government would not rush to save the company's finances any more (better start selling people what they want!), and that nowadays marketing is an important Department... All this while some competitors (such as the Peugot case reported by the Bloomberg article) are sleeping and have lost market share in Europe.
Update: Well to some extent I have answered my own question, since this article from Polish radio explains the strong performance being achieved in the Tychy plant:
Fiat, Poland’s traditional market leader has maintained its lead in the assembly of new cars. Fiat officials say that three shifts are working 6 days a week at their factory in Tychy in the South, to satisfy West European orders.
And of course the link Paris supplied shows workers at the Melfi plant in Southern Italy.
Also amid all the cheering lets not forget this:
"In Western Europe, new-car sales only increased in Germany, by 4.5 percent, as Europe's largest economy — and second-biggest car buyer — finally went shopping after years of little growth. Car sales dropped 13.3 percent in France, Europe's fourth-largest car market, and by 3.2 percent in Italy. Britain, the biggest purchaser of new cars, saw sales fall just 0.7 percent to 413,991. (September data)"
Now this is important since the extra sales in Germany undoubtedly have some relation to the forthcoming 3% VAT increase, which means that in any rigourous accounting exercise part of them should be counted against 2007, since purchases brought forward will mean less sales to come.
or this:
Italy's Fiat SpA saw sales surge 14.9 percent compared with a year ago. Its core Fiat and luxury Alfa Romeo cars proved more popular, although Lancia sales were down. The company ended 17 successive quarterly losses by reporting higher profits in the final quarter of last year.
Update 2: Paris has kindly found us a link in English on the Fiat turnaround.(Hat-tip FxTalks). The results are obviously impressive, and more impressive I admit than I initially appreciated. Fiat is obviously on the attack again after some very bad years, and seems to be leveraging some substantial productivity improvements, as well as having some obviously popular design ideas.
It would now be interesting to see this spreading across more sectors. However, unfortunately, we are far from out of the woods yet. If we look at the other 'elderly' economies, Japan and German, both have been able to introduce substantial reforms to make their most competitive companies even more competitive, so much so that they are obviously now far more efficient than all but the best US companies. This however does not solve their outsanding macro problem which is how to generate additional internal demand, increase their tax base, and be able to sustain their welfare services. Having globally succesful companies just isn't enough I'm afraid. This nut is a hard one to crack.
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