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.
3 comments:
Well at least it didn't officially fall into recession...if any plus point can be derived from this info. So the deficit gets worse but Berlusconi commits to a €5 billion bridge that won't be finished for at least 3years (and knowing Southern Italian timeframes probably more like 5 years) A matter of national urgency, he has said of the Reggio-Messina bridge. Why? The tax cuts on housing I do agree with in principal; Ireland and Spain both dug themselves out of the dungheap through housing/construction booms and the knock on effect on domestic demand. Italy hasn't had the building boom that has affected (or afflicted depending on how you look at it) Spain, Ireland, or even the US and UK. I don't think its the answer, but anything to boost internal demand must be good. To fund the cut in tax I hope they're cutting wages of Italy's overpaid political caste...
Italy burns while Berlisconi fiddles!!!
Hello Callum,
"Well at least it didn't officially fall into recession..."
Yes, so I suppose we can be thankful for small mercies, though at this stage this is a rather technical virtue. Italy's problem, as I say in the post, is long term, and tghe trend growth rate has been - as can be seen in the chart - steadily falling towards zero over the last decade. This raises the possibilility that it might turn negative at some point.
How much of this is simply due to bad policy, and how much is an effect coming from population ageing we simply don't know at this point, but it is something which should be constantly borne in mind.
"Ireland and Spain both dug themselves out of the dungheap through housing/construction booms and the knock on effect on domestic demand."
Yep, but both Spain and Ireland have very different demographic profiles at the present point, and anyway look what is happening to them now.
I think basically it is unrealistic to expect any major "ressurgence" in domestic demand. If we look at Japan and Germany which have the same median age - 43 - we see a similar picture.
Basically what sets Italy apart is its inability to create a trade surplus to get the growth it needs to support the rising elderly dependent population. I don't know how realistic this is, but if it isn't realistic for Italy then it is going to be even less so for a whole line of newly emerging economies who are now steadily moving up the median age slots, so some solution needs to be found, and the experimental test bed here is going to have to be Italy. I hope everyone is ready for this.
"Italy burns while Berlisconi fiddles!!!"
Well quite. But I'm not exactly sure what they are thinking about over at the ECB or in the EU Commission on this score either. If Italy can't grow then the sovereign debt is unsustainable and its as simply as that, even if the implications are huge.
Ciao Edward, any chance of getting Italy out of the Eurozone? Then they could devalue like Argentina. You'd think foreign investment would flow in and growth rates could be 5%? Oh no ... won't work, the sovereign debt is linked to its neighbor's economies.
Seriously though, Italy may have "avoided" an official recession (and let's not hold our breath for that), but as far as I am concerned, they have been in recession for years. Just like you said, this is a long term problem.
1) Italy's eco. growth rate has lagged for years behind its Euro counterparts
2) Italy would have to string together a long-term positive eco. growth rate over the span of several years to gain back what it has lost vis-à-vis its peers and to gain back what it has lost itself, plus Italy would have to sustain a growth rate for a second long phase to begin to create the eco. development that would add value in the global economy and provide opportunity for its people.
Recap:
1-Several years of growth to make up for long term losses and pay pension bills
2-Several more years of growth to began creating economic opportunity for Italians.
As a connaissance from Rome said to me once last year "we have already done our hard work in the world, now it's time to rest".
And with that, I rest my case that Italy's inabilities also stem from the attitudes of its 25-44 population. You cannot blame everything on the old geezers in power, like the young tend to do.
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