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?

Sunday, August 17, 2008

Italy like Ryanair: can it exist with oil over $ 100 per barrel?

Guest Post by Ugo Bardi
Cross-posted from The Oil Drum Europe

Ryanair and the Italian government at odds with each other. This Ryanair advert shows Italy's minister for reforms, Mr. Umberto Bossi, in an occasion where he was expressing his disagreement with the words of the Italian national anthem. In the text, the Italian government is accused of "supporting Alitalia's high tariffs", "supporting the frequent Alitalia strikes" and "not caring about the Italian passengers". Ryanair is understandably angry at the preferential treatment that the Italian government is reserving to Alitalia, Italy's national air carrier. Alitalia is in danger of bankruptcy and has been recently saved by a hefty injection of public money.

An airline is a small economic system that uses fuel derived from oil in order to carry on activities that generate profits. If oil is too expensive, profits disappear and, eventually, the system must disappear, too, bankrupted. Low cost airlines have appeared during the period of relatively low oil prices that ensued after the first oil crisis, in the 1980s. Can these airlines exist with oil over $100 per barrel?

A country is larger than an airline but it, too, needs fuel for its economic activities. And, if deficits run too high, countries can go bankrupt as well. Italy's industrial economy had its moment of maximum growth in the 1950s and 1960s; in a period of low and stable oil prices. Can Italy's industry exist with oil prices over $100 per barrel?

At TOD, we have been discussing economic collapse for a long time and Italy may provide for us an interesting test case (although Spain, too, may be in the race). Maybe collapse is too strong a word, but it is clear that things are not going well in Italy. We can find plenty of data about the Italian economy in the excellent blog by Edward Hugh "Italian economy watch" . His posts of the last months read like a horror story. Here are a few examples; first, Italy's inflation:

Here is Italy's industrial production:

And Italy's business confidence:

Here is Italy's GDP:

There are many other chilling data that you can read in Hugh's blog, but let me show you a graph that I made myself about Italy's oil consumption. I am sorry that the captions are in Italian, but I think you understand what it is about: Italy is using less and less oil; a sure sign of a slowing down economy:

And there is much more. For instance, we may give a look to the status of that ancient Italian organization which is the Mafia . On that, I found this graph made by the Italian ministry of interior.

Image from the site of Italy's ministry of interior, The red line shows mafia-related homicides, the black one all the other crime related homicides.

"Peak Mafia", apparently, took place in 1991. Maybe Mafia methods are becoming gentler, but it might also be that even Mafia is in economic decline. After all, Mafia is an economic organization, although engaged in quite different activities than those of a typical airline. So, it may suffer because of the high oil prices, too. Of course, you might argue that homicides are a diseconomy for mafia and that the less homicides there are, the more efficient the organization is. Could be, but it is also true that number of all violent crimes in Italy seem to be stagnating or in decline, according to the report of the ministry of the interior. Maybe Italian criminals are becoming too poor to buy ammunition.

The economic decline seems also to be taking a toll on the health of the Italians themselves. Life expectancy had been constantly growing in Italy for the past 50 years. But, recently, the trend has stopped (see this article of mine, unfortunately in Italian). Is it due to a natural limit of to the deterioration of the Italian health care system and in general of the quality of life in Italy? We can't say for sure, but the second hypothesis cannot be ruled out.

Now, I am not an economist and I am not qualified to interpret such things as macroeconomic indicators (or mafia trends). But, surely, what we are seeing needs to be explained. I can see two main possible reasons for the decline of the Italian economy. One is demography, the other the high prices of oil. About demography, there is no doubt that Italy is becoming a nation of old people. You can see that in statistics, but you also can get a visual impression of the large number of aged people by walking anywhere in Italy. Old people, of course, don't produce goods and tend to buy less. That would explain, at least in part, the general economic decline of the country.

But, of course, high oil prices are also playing a role; perhaps the most important one. Although some oil and gas are being produced on the national territory, Italy is nearly completely dependent on imports for its energy production. Most of the electric power in the country is made using imported natural gas; Italy has no nuclear plants although it does import nuclear energy from France and Switzerland. Renewable energy exists mainly in the form of hydroelectric plants in the north of the country. Italy has been very slow in moving towards the new renewable technologies: wind and photovoltaics. So, high prices of fossil fuels badly damage an economy that needs to export manufactured products to survive. With high energy prices, Italian products become more expensive and therefore less competitive on the international market. So, exports decline and Italy is less and less able to pay for energy imports. In addition, high oil prices are also adversely affecting tourism; a traditional source of revenue for the Italian economy. With less money available and more expensive energy imports, what ensues is the deadly spiral of economic decline which we are seen in the data.

From here, I could tell you a lot on how Italians are reacting (actually, non-reacting) to the situation. In this hot summer of 2008, Italians are enjoying their vacations. They seem to be worried mainly about sports and convinced that all problems are due to crime, speculation and immigration. Most people seem to believe that the Euro currency is the culprit for the decreasing purchasing power their salaries. Nobody is discussing the possibility of an economic collapse. Whenever some data show that the economy has improved a bit, it is hailed with enthusiasm in the front pages of the newspapers. When the data show that it has gone down (much more often) it is written in small characters in an inner page. Italians may be unpleasantly surprised on coming back from their vacations, this september.

The government of Mr. Berlusconi has been elected a few months ago on the basis of plenty of promises that - as usual for governments - will be hard to maintain. Besides cutting deeply on expenses, including privileges of public employees, the government seems to think that all problems can be solved by a grand plan of public works that includes new nuclear plants, a giant bridge over the strait of Messina, high speed railways, highways, waste incinerators and more. The plan seems to be considered a good idea by most people, including the main opposition parties. But, of course, a lot of energy will be needed to carry out the plan. This energy will have to be imported and someone will have to pay for it. It doesn't really matter whether the money will come from the government or from private funds, it is money that Italy doesn't have. And you know what happens if you keep spending money you don't have.

A slow collapse is a decline and a fast decline is a collapse. Whatever it is, as an Italian citizen, I am seeing it unfolding right around me. At least, I am fortunate enough in not being also an employee in a low cost airline.


Luca said...

Some of the statements in prof. Bardi's post really seem controversial to me.

First and foremost the hint or suggestion that Italy's economic crisis might have been triggered by the raising prices of oil. Deriving the crisis from the decreasing consumption of oil by Italy due to its raising prices is confusing the cause with the effect: the economic crisis is pushing down the consumption of oil in Italy, and not viceversa. As the chart clearly indicates, in fact, the decreasing trend of consumption started well ahead the increase of oil prices. The economic crises in Italy has rather been triggered (but I would prefer to say 'worsened' or 'strengthened') by the political vacuum, by the absence of a political class able to manoeuver the country and its extremely difficult macroeconomic factors since the beginning of the '90s, following the foolish economic policies carried out for over a decade during the 80s. The economic crisis affected all western countries at the same time, during the first half of the current decade, but other countries reacted more vigorously and more consistently. Our macroeconomic policies in the past had been characterised by frequent "competitive" devaluation of our currency, but this tool became not available anymore after the entry into the euro system. So while Italy was accustomed to face rising costs (in real terms) of primary factors (like oil), it was not accustomed to compete on the market on a levelled playground (i.e. improving efficiency and productivity in real terms and not just by impoverishing its population by decreasing the value of the circulating money).

The ageing of the Italian population also does not seem to me to be able to affect the macroeconomic fundamentals yet. I am a son of Italy's demographic boom of the 60s. I lived all my life in a constant overcrowded situation (at school first, then at the University, than on the labour market, and finally on the housing market). We baby-boomers have now entered in our spending-age. If my co-aged peers had chances to spend, we would now be able to vigourously support domestic markets. But - it is as simple as that - we don't have the money to do it. My peers are poorer than people were at our age 20 years ago. Once again, an effect has been confused for a cause.

Finally, one quick word on the graphic concerning mafia homicides. The use of that chart is simply appalling. Whoever has a minimum of knowledge of mafia's strategies knows that the peak of homicides reached by mafia in the first 2-3 years of the 90s was inversely related with their actual power. Rather than showing the mafia "economic wealth" they were a violent reaction to a change in attitude of the central government strategy to fight against the mafia. Establishing any relationship between the economic "liveliness" of mafia as an "economic entreprise" and that graphic is just unacceptable.

I am sorry if I sounded hypercritic, but I usually appreciate the posts of prof. Bardi, much more than this one.

Edward Hugh said...

Hello Luca,

"First and foremost the hint or suggestion that Italy's economic crisis might have been triggered by the raising prices of oil."

Just to clarify I don't think the argument is that Italy's "crisis" was triggered by the increase in oil prices, the "crisis" and mild decline is ongoing (and I would argue that it is ageing related, see below), what happened was that the sudden food and energy spike simply put more pressure on an already weakened system and turned the whole thing critical. Italy's economy is now in a critical state IMHO, since a small incidental detail like reversing gear on the plan to reduce the fiscal defict to zero by 2012 can set in motion a chain of events (especially via the intervention of the debt rating agencies) which can simply send the whole thing off into tailspin.

"te economic crisis is pushing down the consumption of oil in Italy, and not viceversa."

Well, what exactly does viceversa mean here, since I don't see the symmetry?

Consumption of oil would be in more or less secular devline as domestic demand for everything starts to stagnate in Italy as the median population age rises (and for an understanding of this phenomenon we are indebted to the life cycle theory of Italy's most famous economist ever: Franco Modigliani.

But the most recent "push" downwards most certainly comes from the price shock. Isn't it standard Econ 101 that as the price of something rises consumption tends to go down.

Living in Spain, and watching how company after company is raising prices right now as the economy and domestic demand crash I sometimes think that "Latin Economics" is a brave attempt to deny these basic economic laws of gravity (crafted as they normally are by those "horrid" anglo-saxons), but just as in the case of Newton's apple, what was always going going to head towards earth will head towards earth.

"The economic crises in Italy has rather been triggered (but I would prefer to say 'worsened' or 'strengthened') by the political vacuum, by the absence of a political class able to manoeuver the country and its extremely difficult"

This is really what I am referring to as Latin Ecxonomics. There is undoubtedly some truth in all of this, but there are very powerful underlying structural forces at the economic levelm also at work, and you deny these I would say at your peril, since they won't simply go away via an act of will.

"The ageing of the Italian population also does not seem to me to be able to affect the macroeconomic fundamentals yet."

I am afraid in terms of simple macro dynamics it is already very operative on both the consumer demand side now (no real growth and dynamism, same case Germany, same case Japan - both have the same median population age of around 43) and on the labour market dynamic supply side, look at all the extra immigrants who have been sucked in while many Italians have been breezily taking early retirement at 59 and 59 years of age.

Ugo Bardi said...

Dear Luca,

of course, everything is controversial. And nothing is so controversial as understanding what is the cause and what the effect in economic phenomena. My impression is that the world's economy follows the vagaries of the oil price, and I would not be surprised that Italy, being economically weak and - also - poorly adminstered, suffers earlier and more than others. Incidentally, the decline in Italian oil consumption can be reasonably well correlated with the rise in oil prices. Neither started this year!

As for peak mafia, it was just for fun. Not to be taken as a macroeconomic indicator!


Luca said...

Dear Edward and Ugo,
first of all let me thank you for your in-depth and kind replies.
I would like to clarify a few points which obviously I did not express clearly in my previous comment.

1) Although the economic crisis affecting the western world is obviously of a systemic nature, it is difficult for me to associate it with the increasing scarcity of oil. In that case the crisis would affect all economies at once. But we know that there are, out there, economies booming (or at least growing at a steady pace). And I would not consider those economies as "oil independent".

2) As a consequence, although oil prices are indeed worsening the situation (I don't deny that the price shock played its role in the push downward!), I would consider it as a contingency rather than a cause. When I said "the economic crisis is pushing down the consumption of oil in Italy, and not viceversa.", I meant that there is no such thing as a shortage of oil depressing Italian economic growth. If we couple the appreciation of euro over the dollar, the increase of price of oil is not able to put such a high pressure on an industrial system which was traditionally based on increasing costs of raw materials (due to the periodic devaluations of the lira).

3) Putting together different economic situations like Italy's and Germany's ones does not work either. German exports are pulling on the economic growth of Europe, while Italy's been on the verge of recession for almost (or more than?) a decade now. Italy's industrial model (the SMEs so much celebrated only a few years ago) failed brutally with the entry into the euro system, because it lost the possibility to make use of the competitive devaluation of the lira. It lost the competition with the South-East Asian emerging markets, while the lack of a political class truly able to understand the challenge prevented the conversion to a different industrial model.

4) I have the feeling that your analyzes are completely forgetting the monstrous impact of the huge Italian deficit, and the associated servicing costs. These, in turn, convert into increased fiscal pressure, reduced capacity to carry on any proper infrastructural and public investment policy. The weakness (or incompetence) of the political class also resulted in lack of essential reforms to enhance the efficiency (and effectiveness) of the state machinery. This can be felt at all levels: I live and work primarily abroad, and the presence of Italian companies is virtually absent because of the incapacity of our "diplomatic" offices (and I mean all the various different institutions created to this aim) to act consistently in their support.

5) On ageing I must convene that the way you put it actually works. I am still convinced that, had my generation been given the same conditions as 15-20 years ago, in terms of spending power, we would be able to push up the domestic consumption to sustained levels. But it is in fact true that account must also be taken for the missing component of the younger generation of those born after 1980, which would now start to increase their spending while entering the labour market...

Thank you very much for the very interesting discussion.