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Tuesday, February 12, 2008

Confindustria Reduce Italy Growth Forecast For 2008

Confindustria, Italy's largest employers' lobby, cut its forecast for Italy's 2008economic growth to 0.7 percent today. This is less than half the 1.8 percent rate of expansion predicted for 2007. Confindustria had been forecasting that Italy's economy, Europe's fourth biggest, would grow by 0.9 percent, and this had been a strong markdown from earlier higher estimates. The Rome-based employers' group updated its forecast after the national statistics office yesterday said December industrial production unexpectedly declined for a fourth month (see this post yesterday).

Also they seem to agree with me that Italy may well already be in recession, and say that the Italian economy probably contracted 0.1 percent in the fourth quarter of 2007 when compared with the previous quarter, according to a statement released yesterday by their research department. Technically a recession is two quarters of back to back negative growth. So we may have just had the first one, and now we need to see in more detail what happens in Q1 2008. Confindustria are, however, rather more optimistic than I am on this front, since they forecast that industrial production will "bounce back" in January, rising 2 percent from December. We will see. Clearly, after so many months of decline, some sort of recovery is to be expected, but conditions are hardly favourable at this point.

Really I would simply like to reiterate what I said at the start of January:

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.

2 comments:

Anonymous said...

Hi,
thanks for your great job on this blog.
What is your opinion of the sustainability of the public debt?
In my opinion the political scene does not show many signs of change, if we assume that Italian politicians won't reduce public expenditure and hypothesizing that this will grow over the next 10 years at the same average pace of the last 10, what do you think that could be the result? Assuming that the GDP will grow over the next 10 years in average of a 0.5-1.0 p.a.
Thanks, and I apologize for my scarce understanding of public finance,
Regards

Edward Hugh said...

Hi

And thanks for the nice comment.



"What is your opinion of the sustainability of the public debt?"

Well you do seem to go right to the heart of the matter.


"In my opinion the political scene does not show many signs of change, if we assume that Italian politicians won't reduce public expenditure and hypothesizing that this will grow over the next 10 years at the same average pace of the last 10, what do you think that could be the result? Assuming that the GDP will grow over the next 10 years in average of a 0.5-1.0 p.a."


I think you have things summed up pretty well, and these all seem to me to be reasonable assumptions.

We are unlikely to see any substantial changes in the political status quo in the near future - would that we were - and the present tendencies may even be reinforced by continuing voter ageing, which is likely to produce even more inertia, and growing clientilism towards the over 50s as these voters near the point of constituting an electoral majority.

You estimate of GDP growth also seems reasonable, and if anything the downward trend in the growth rate might even continue as the workforce continues to age, due to aggregate productivity effects.

The same with your public public spending guesstimate. It is important to think about the role of the structural - ie non discretionary - spending items. Unless we have a substantial reduction in levels of payment on health and pensions (which is unlikely due to the political issue, but as a % of GDP Italy now has one of the highest levels in the EU here) then the debt will simply continue to rise.

So we have one line trending down, and another trending up, and at some point they cross and move apart permanently (if indeed they haven't already done that, in 2007 we were wobbling around on the margin). So the next question is when the key market players get to wake up to this. A lot depends on the state of play in the eurozone generally (ie what level of economic growth there is), how attitudes move at the ECB, and what criteria the credit ratings agencies develop towards problematic sovereign debt in ageing societies like Italy and Japan. I think it is important to remember that they have been subject to considerable criticism lately for being too lax.

All this is very hard to decide about, but I would say your suggestion of a 5 to 10 year horizon is not unreasonable for push comes to shove time.

I have posted extensively on this in the past, and you can find some pointers here and here.


Some early indication may come from following Hungary, whose debt dynamics may turn critical in 2008 for much the same reasons Italy's may worsen. Now Hungary is not in the eurozone, but considerable tolerance has been shown towrads thee debt since it was thought that early membership was probable, and that as a result the sovereign debt would get some sort of "zone" protection. If EU institutions prove incapable, at the end of the day, of protecting Hungarian government debt, then this will be both an early sign of zone weakness, and an indication of what might get to happen to countries with problematic situations inside the zone. So I would say Hungary is definitely one to watch.