Thursday, September 20, 2007

Italy Second Quarter 2007 Unemployment and Employment

According to Bloomberg this morning:

Italy's unemployment rate unexpectedly dropped to a record low in the three months through June as the economy expanded for a second year, prompting companies to step up hiring.

The jobless rate fell to 6 percent from 6.2 percent in the first quarter, the Rome-based national statistics office Istat said today. That is the lowest since 1992, when Istat began to record the figures.


This growth-driven stepping-up hiring picture - which is by no means unique to Bloomberg - unfortunately isn't quite the whole Italian labour market dynamics story, as the latest complete data set from ISTAT reveal. Let's have a look at why it isn't.

First off, Italy's unemployment rate has been declining, there is no doubt about that. Here's the chart from Q1 2004 onwards.



But how do we interpret this drop in employment? That is the question. Is there more going on here than meets the eye at first glance?

Well, if we look at the next chart for the size of the Italian labour force and the numbers of those employed, then we can see that the Italian labour force does now seem to have "maxed out" (in terms of reaching its ceiling), and may possibly even be slightly declining. At the same time the new employment creation element is very small indeed:



This position becomes even clearer if we look at the year on year changes, where we can see that the size of the labour force turned negative at the end of 2006:



The situation is particularly dramatic and preoccupying in the Italian south (the mezzogiorno), as can be seen from the following chart, the labour force actually went into decline after the second quarter of 2006:



And again, if we look at the unemployment data, we can see that the drop in the south is particularly dramatic:




This situation is extremely preoccupying, especially since the South has been receiving comparatively little immigration. It is preoccupying since it is quite simply unsustainable.


If we look at the migrant presence in Italy, we will see that this has increased considerably in the last few years:




But we will also see that the presence is very unevenly distributed, with proportionately few migrants being in the south, although, as we have noted, the active labour force in the south is contracting more rapidly:



Also, as we can see below, migrants, due to their demographic profile (the age ranges, more being male, etc), tend to have a much higher labour force participation rate than native Italians:




And again, while the economically active migrant population do have a slightly higher unemployment rate than the native Italian equivalent, the order of magnitude is not large, especially given their very high participation rates.





One of the principal problems Italy is now facing is that the number of workers in the most productive age groups is now starting to decline as a % of the total population. If we take a look at the chart for the 25 to 49 age group, we will see that this group rose steadily as a share of the total till the early years of this century. Then the proportion started to level off, and now it is just begining to turn down. 25 to 49 isn't necessarily and exact measure of the most productive group, probably 35 to 50 would be better, but it is the data we have from Eurostat, and it is a good enough measure of the extent of the problem.






If we look at part-time employment as a proportion of total employment, we will see that this has also been on the rise in Italy in recent years, and again this is not surprising in the light of the population ageing which is taking place, and what we know about the impact of this on the functioning of labour markets.



So, far from the Bloomberg story of lots of job creation and healthy economic performance being the case, if we look at the quarterly year on year chart for GDP we will see that the Italian economy has been slowing visibly since the last quarter of 2006 and may well be now heading for a recession this winter:




The position is even clearly when we come to look at the rates of growth from one quater to the next:



An examination of the retail sales chart tends to confirm this prognosis, after a spike at the end of last year, sales dropped back, and there is now virtually NO change year on year over the previous corresponding months in 2006.



The industrial output trend seems to be very similar, which a spike at the end of 2006, and output actually turning down after May 2007.



At the end of the day all I can really say about the more complete picture we can get from this data, is that it is now well past time that people stopped selling themselves pipedreams that everything is running smoothly and that the need to address the real structural ageing-related issues which Italy actually faces is getting to be more urgent by the day.
Posted by Edward Hugh at 10:46 AM

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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.

On the left you can see a chart for Italian male life expectancy, and on the right there is one showing the evolution of the Italy's median age between 1990 and 2020. Just why such factors are important, and need to be taken into account along with more standard macro economic data in accounting for Italy's stubbornly low growth rate since the mid 1990s is explained in the posts.

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.


Next on the left we have a chart for recent movements in Italian inflation while on the right we can see changes in the trade gap between exports and imports. Inflation is reasonably tamed in Italy (now why?), despite the recent slight uptick, but it is Italy's inability to generate a trade surplus which is the main problem structurally.


Now on the left we have the chart for household consumption and on the right the recent retail sales data. Finally the chart on the bottom left shows recent movements in Italy's business confidence index,while the chart on the right shows the equivalent data for consumer confidence.Bottom line, the evidence of growing weakness is everywhere.

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.