Commentor Hans asked me in an early post on this developing crisis whether I saw any realistic alternative to the Prodi coalition. I had to admit that I didn't. Neither the Prodi coalition nor the Berlusconi one seem equipped to offer Italy the kind of policies she needs at the present time to get out of the mess she is entering as I write. So all I can do is mutter "here we go", roll my eyes, and look towards heaven.
My topic is economics, and the economics data is almost uniformly bad. Will an election do anything to help in this situation? I severely doubt it. What Italy needs to do is to wake up to the underlying and long term structural and demographic processes which are affecting it, and I very much doubt an election setting is the adequate place to get us on that road.
Indeed confindustria seem to agree with me since the head of the employers lobby Luca Cordero di Montezemolo is quoted yesterday as saying that Italy's ongoing political turmoil will only aggravate the effect of slowing economic growth in the U.S. and Europe and may lead the Italian expansion to stall even more than it would do this year.
``We will grow less than the other European countries this year and given the crisis, growth will likely be closer to zero than a higher level,'' Montezemolo, who is also chairman of Fiat SpA, told journalists during a conference in Milan. Confindustria's official growth forecast for Italy this year is 0.8 percent, though the ``situation is very difficult as far as consumption goes and in terms of economic growth,'' he said. Montezemolo said that the election law needs to be changed to ``guarantee governability.''
Indeed in saying that "growth will likely be closer to zero than a higher level", Confindustria seem to be moving nearer to my own forecast (which I think was the lowest one in the market when I made it) back at the begining of January.
More evidence of the storm clouds which are gathering. The latest of these is the January reading on the EU commission European Confidence Index. As can be seen in the chart, while there is some rebound in Ireland (the decline in previous month had been very steep), Spain continues its downward trajectory, and Italy continues to plunge.
Also the general movement in the index across eurozone countries is also clearly downwards.
Finally a relatively trivial, but in some ways quite significant piece of data yesterday:
Motorcycle and scooter sales in Italy, Europe's largest market for powered two-wheelers, slipped 7.7 percent in January after the collapse of Prime Minister Romano Prodi's government hurt consumer confidence. Italian new registrations of the vehicles fell to 25,896 last month, the Italian Motorcycle Association, Ancma, said in an e-mailed statement today. Scooter sales fell 5.1 percent to 16,295, while motorbike registrations dropped 12 percent to 9,601, Ancma said. "The sentiment of uncertainty in the country has penalized sales" Ancma President Guidalberto Guidi said in the statement.
Update
I am just adding some charts to accompany the discussion in comments, to try and clarify a number of points. The charts are Italian imports and exports, German imports and exports, and Italy GDP and exports growth. The central point is that a comparison of Germany and Italy is interesting and instructive since they both have the same (very high, 43) population median ages, they consequently both suffer from weak internal consumption, and need to depend on exports for economic growth. This is a fairly fragile combination, since it means that each time the rate of expansion in global growth slows there is a collapse in GDP growth (ie there is no possibility of decoupling), and it is quite clear from the German chart what happens next to the German economy, which is why Trichet changed his discourse last Thursday presumably.
The big and important difference between Germany and Italy is that Germany gets quite high rates of export growth during the good years, and runs a trade surplus. Italy gets comparatively low export growth rates (for an export dependent economy) even during the good times, and of course Italy's fiscal debt is now so large that there is little room (in fact none) for fiscal easing during the downturns. So Italy's target has to be to emulate Germany, even while knowing that this is not a complete solution, doing something is always better than doing nothing.
Oh, and just for good measure, here's Italy's long term GDP growth rate.
10 comments:
Ed, talking about elections, do you know that a 24 year old cannot be elected and can vote only for the lower chamber ?
correction: talking about demographics :-)
Hi Hans,
No, I didn't know that. But I had been struck by the age of all the key participants in the latest "mini crisis", Prodi, Berlusconi, Napolitano, Marini. This is hardly a "youthful" image.
another argument few are writing about is the referendum about the election law. A few weeks back this referendum has been approved by the Supreme Court. While doing so the Court let the parliament know that it didn't the time to digg deeper, but the Court signalled that the actual election law might be unconstitutional. But that's a minor detail!
With the new government in place the referendum must be held within two years (maybe one, I'm not sure)
. With a new election law in place it's generally thought that new elections should be held.
Now the newly elected government could try in bipartisan move to get thru e new election law because this would kill the referendum.
But again, with a new this time bipartisan election law new elections should be held.
So you might ask why don't they put in place a government with the only scope of changing the election law ?
Well that's exactly what Napolitano tried with Marini. But Berlusconi said no.
As a note o color I'd like to add that in actual senate there are 8 senators which weren't rightfully elected. Parliament's election commission (in which two of the not rightfully elected senators sit) couldn't solve the problem.
The vote count in the Senate with the rightfully elected Senators when Prodi went under would have been positive.
Minor details, too.
Mr. Hugh, is out there any good news about my country? Will a day or another grow again 3% /year? Or we better go and get a Chinese passport before it's too late?
Hello Demo,
Well I think unequivocally good news about your country is running pretty scarce these days. On the main topic:
"Will a day or another grow again 3% /year?"
I don't think a 3% growth rate is a feasible target for your country, given the extent of population aging your pyramid has already suffered. But I don't think you need simply abandon ship. I think there is plenty to be done, and of course Italy isn't alone in having this problem, it's just one of the first to get to the point it has. But I do think that the road to finding a more stable balance passes as much as anything through facing up to what is actually happening, forgetting pipedreams - ie that the country will suddenly for some inexplicable reason have a growth miracle - and get down to the hard work of hammering out consensus policies which can take the country forward.
I've no instant solutions in my back pocket I'm afraid, nor do I think this is the kind of problem whichis need of "instant coffee solutions".
Hi, I was wondering what exactly is causing Italy's economic decline. I have read that Italy's strong point is exports. I don't know how much exports contribute to the national GDP, but I believe that it is a substantial figure. I read an article that said Italy's exports grew by 11% last year (in value). This put italy ahead of the uk apparantly. Despite this gain Italy's economy grew by just 1.9% last year. Why? Is my growth figure out (it was prodi that was used as the source for the article), or is italy's debt/government spending/falling consumer demand causing negating strong growth. Italian companies seem to be performing well, and while this obviously doesn't mean that the economy is healthy it must help. If Italian consumers decided to buy more could they create growth, and by stretching themselves today would they benefit in the future? Of course, for solid growth Italy needs a proper government willing to reform the economy, a
young(er) prime minister that will tear up the political caste. Considering current conditions italy is unlikely to get such a government for a while, so meanwhile could Italian's buy themselves out of economic malaise?
Edward, thanks for your reply. Following Cullum comment, I would like to add my own experience and perceptions since I used to live in SE Asia (where economies are growing really fast)for the past 6 years. In Hanoi, Bangkok and Manila there are every year more and more Italian (or supposed Italian) brands in the shelfs and although it's always the stuff that cost more, people there (those few with money) are keen to buy everything sounds Italian! Of course, I understand (i am not an economist) that this doesn't mean economic growth, but as an outsider, it looks like those "italian" firms are actually making more and more money out of the Asian markets.... so, I wonder, where the money goes? (...well, not in Italy apparently...)
Hello again Demo,
"since I used to live in SE Asia"
Oh, I see. Now I understand the comment about packing the bags and leaving for China. I thought for a moment you were thinking of the character from Gianni Amelio's recent film - La Stella Che Non C'e` (The Missing Star) - where Sergio Castellitto plays an Italian industrial technician - appropriately named Vincenzo Buonavolonta who actually does go on a voyage of discovery to China.
The issue is not a trivial one, since I have the impression that the film captures some of the sense of innocence and amazement your "average Italian" feels before a rapidly changing and globalising world. As the Buonavolonta character says at the end of the film “I never imagined China to be like this.”
Ok, now for the more serious points, although the first flows from what I have just said, what I feel is that Italy needs more than anything at this point is a change of mindset, and a determination to do something to put all those things that have been just let slide back on the rails. Either that, or more and more young people will be packing their bags and leaving.
Now on demand internationally for Italian products, I am sure you are right, but we need to distinguish macroeconomics a bit here from miicroeconomics (in this case simply business). The numbers Callum and I are talking about are aggregate macro data. These can be good or nad, but whichever they are some people can always do very good business.
Japan would be an excellent case in point here. Aggegate wages and salaries have been falling systematically in Japan in recent years, and consumption internally has been even worse than Italy - indeed they haven't been able to shake off price deflation - but many Japanese companies are world leaders in their fields and profits have been at all time highs. So all of this is a very complicated problem, and we don't have all the answers we would like to have at this point about what to do about it.
I mention Japan, since it is another country which has similar ageing population, public debt and longer run growth problems to Italy.
Now Callum
Yes, I think you have more or less the picture. But....
"I have read that Italy's strong point is exports. I don't know how much exports contribute to the national GDP, but I believe that it is a substantial figure."
This isn't quite the case. Italy has a better export position than the UK, but the position of the two countries is quite different. The UK is still much younger (median age around 39) and domestic consumption is a much bigger driver of growth. Same case France (just to show this is not a simplistic "anglo saxon growth" type argument). The key differentiating factor seems to be population median age.
However, Italian exports are nowhere near annual growth rates of 11% - I wish they were!
I have added some charts to the main post to try and make the position a bit clearer. The charts show Italian imports and exports, German imports and exports, and Italy GDP and exports growth. The central point is that a comparison of Germany and Italy is interesting and instructive since they both have the same (very high, 43) population median ages, they consequently both suffer from weak internal consumption, and need to depend on exports for economic growth. This is a fairly fragile combination, since it means that each time the rate of expansion in global growth slows there is a collapse in GDP growth (ie there is no possibility of decoupling), and it is quite clear from the German chart what happens next to the German economy, which is why Trichet changed his discourse last Thursday presumably.
The data I have used on exports are constant price (ie real not nominal values), and come direct from the quarterly GDP accounts published by ISTAT (who give all this on a nice excel sheet).
The highest rate for annual % change was in Q1 2006, when it was 6.9%, even adding in a couple of points for inflation you don't get to 11%, and this was just one quarter! (Actually now I come to think of it, the German data is probably current prices since it originated in the monthly series published by the Federal Statistics Office, but then even allowing for inflation, the difference is still very significant, all I was interested in when I originally made the German chart was the slope of the line, which is, I think, very revealing).
The big and important difference between Germany and Italy is that Germany gets quite high rates of export growth during the good years, and runs a trade surplus. Italy gets comparatively low export growth rates (for an export dependent economy) even during the good times, and of course Italy's fiscal debt is now so large that there is little room (in fact none) for fiscal easing during the downturns. So Italy's target has to be to emulate Germany, even while knowing that this is not a complete solution, doing something is always better than doing nothing.
"Why? Is my growth figure out (it was prodi that was used as the source for the article), or is italy's debt/government spending/falling consumer demand causing negating strong growth."
No, your growth figure isn't out, and these factors are a definite drag on growth, as is the currently rapidly accelerating trade deficit (see chart). We have really to wait and see the Q4 2007 GDP data, but Italy may already have fallen into recession.
I have also included a log term GDP chart in the post, so you can see the extent of the problem and the decline.
Now why does this matter? We in the Western world are now all fairly rich, maybe zero growth wouldn't be such a bad thing, considering global warming and everything.
Well the problem is the ageing dimension in all this. Italy is in transition from having a very favourable high proportion of its population in the working ages. This is now steadily set to increase year by year, so the cost of supporting this growing elderly dependent population is simply going to increase, and the cost has to be met. So this is why you need growth, and why the debt issue is now going to become the big one I think, especially after the credit ratings agencies have had to take so much stick about being too slack in the US sub-prime scandal.
I say Italy needs a change of mindset. I will give just two examples. Attitudes to working longer, and attitudes to young people. In the first case the Italian administration needs to get across to people that they are going to have to work later in life, and even to take a new lower paid second job after they finish the lifelong one.
I have a feeling that both Spain and Italy - who have very low labour market exit ages - have been importing immigrants in large numbers to do jobs that older Italians do not want to do (NB I am not against having immigrants, they are important, but as a complement, not as a substitute). So to some extent immigrants are paying for early retirement, and this is ridiculous.
Spain has been much more masked in this sense, since they have been living on the back of a huge construction boom. This now seems to be over, so we are about to get to see what happens next.
The German and Japanese cases are again very different, since native Germans and native Japanese are doing these jobs. So this is an important example. Italians and Spaniards are going to have to swallow a lot of that "pride" and start to accept they may well need to do much more humble jobs.
At the other end of the scale we have the attitudes to young people, who I constantly feel are being held back by what now virtually amounts (in political terms) to a gerontocracy. I am pasteing below a report on the latest Eurispes report. The thing is - and again in both Spain and Italy as far as I can see - why do young people only start to earn decent salaries much later in life, when the same people can go to the UK or Canada or the Netherlands and find themselves a much better paying job with better conditions quite quickly. So it can't be their economic worth that is holding them back.
Also attitudes to cohabitating, and having children before formal marriage need to change, at least if you want to have more children in Italy they do. This seems to be the biggest single difference between north and south Europe on the fertility front at the moment. People in the south are increasingly cohabiting, but I think there are very few cases of actually have children before tying the knot. Attitudes of older Italians again need to change here, to become more tolerant in this regard. Maybe someone should explain to them that it is their pensions that are at stake.
Italy's population of "over-sized babies" now stands at over 7 million, and most of them are male. According to a EURISPES report, the number of 'youngsters' between the ages of 18 and 34 who were still living with their parents stood at 7 million 368 thousand in 2006. They were concentrated in the range 25-29, with 59.1 percent of young people in this age-range still living in the parental home, most of them being young men. Employment figures provide the explanation for this apparent "cuckoo-effect" among Italy's youth: only 40 percent of 20-25 year-olds were in work, as against 60 percent in the remainder of Europe, and even when they get employment, their wages are lower than the EU average.
Emancipation from dependency means, according to EURISPES, financial independence. While youngsters in the 60s struggled to introduce new values, today the struggle is to get away from home and find a professional role within society. Compared to 50 years ago, young people do not have access to their parents' wealth accumulated wealth, because families have lowered their levels of saving and the average life-expectancy of parents has lengthened. In just five years (2001-2005) Italy's families have reduced their annual savings by around 40 percent; in the space of 4 years, (2003-2006) life expectancy at birth for men has increased from 77.2 to 78.3 years and for women from 82.8 to 83.9. (AGI)
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