Italian June Retail Sales

Well, in many ways I don't find this surprising, but I do think it is relatively important:

Italian retail sales in June fell at the fastest pace in 15 months as higher borrowing costs and rising taxes left households with less money to spend.

A seasonally adjusted gauge of retail sales fell to 46.5, the lowest since March 2006, from 47.7 in May, according to a survey of 440 retail executives compiled for Bloomberg LP by NTC Economics Ltd. The reading held below 50, the level that signals a contraction in sales, for a fourth month.

So a combination of higher energy costs, higher interest rates, a high euro and higher taxes are all finally taking their toll, as I think it was quite predictable that they would. The recent consumer confidence reading would seem to offer additional confirmation.

And all of this is just one more reason why this wasn't very good news. The fiscal deficit issue, is, unfortunately, at some point going to rear its ugly head again.

Consumer confidence in Europe's fourth-biggest economy dropped this month to the lowest in a year as optimism was choked by the higher borrowing costs and rising energy prices, a report showed last week. Crude oil prices have risen 12 percent this year and are trading at almost a $70 barrel, boosting the cost of electricity and gasoline. Bills for housing, water and electricity increased 2.5 percent in May from the same month a year ago, government statistics show.


The drop in confidence and retail sales may weigh on growth in a country where consumer spending accounts for two-thirds of the $1.8 trillion economy. Italy has already trailed behind the euro region for 11 years and growth will lag behind this year, as well. The euro-area economy will expand 2.6 percent in 2007 while Italy will grow 1.9 percent, the European Commission forecasts.

Italian retailers fared worse than their European neighbors, according to today's report. In Germany, the euro area's biggest economy, the retail index rose to 49.2 from May's three-month low of 47.3. In France, the index fell to 48.2 after 14 consecutive months of growth. Those declines led European retail sales to fall for a second month.

Budget Deficit Target

Well, this doesn't sound like good news:

The Italian government is set to increase its 2007 budget deficit target, a victory for coalition leftists who want more public spending....In what would be a big boost for the left wing of Romano Prodi’s centre-left government, which has criticised the economy minister’s insistence on budget rigour, the 2007 deficit target would be increased to 2.5 per cent of gross domestic product from the current 2.3 per cent forecast.


Now certainly the projected change does not appear to be massive. As Anna Finocchiaro says "in terms of percentages, we’re talking about tenths of a percentage point", but then again we are talking about forecasts, and economic growth may yet turn out to be below expectations, in which case the deficit would come in above target. Really - at this point - it is a question of the signals you send. And again, in the background, there is this:

The government is consulting unions on how to alter pension reforms, passed under the former centre-right administration, to raise the retirement age.

Now it is not that I am looking for draconian cuts simply for the sake of them, but the key question is the sustainability of Italian government finances, and in the somewhat shorter term there is this to think about.

Italian Consumer Confidence June 2007

How things seem to change on Bloomberg from one day to the next. Earlier this week they were - erroneously - trying to convince us that the underlying employment situation was improving, today they tell us:

Italian consumer confidence unexpectedly dropped in June to the lowest level in a year as rising interest rates and higher gasoline costs left families with less disposable income.

The Rome-based Isae Institute's index, based on a poll of 2,000 households, dropped to 107.2, the lowest since June 2006, after a downward revised 109.4 in May. Families have seen their disposable income shrink as rising interest rates make consumer loans and mortgages more costly, while oil prices above $60 a barrel are adding to the financial strain.

Households have grown more pessimistic about prospects for the economy and their ability to save. A sub-index measuring confidence in the general economic situation dropped to 89.3, the lowest in more than a year, from 95.8 last month, while families' have never had a tougher time to set money aside and sometimes have to dip into their savings to balance their household budgets, the report showed.

Really my general impression is that the Italian economy is now slowing significantly, but I think we need to see some more data to get a clear picture

Italian Employment

This piece in Bloomberg today really caught my eye:

"Italy's unemployment rate dropped to a record low in the first quarter as growth in Europe's fourth- biggest economy outpaced expectations."

It caught my eye, since it has to be considered as what you could call "real spin". So what is this really spectacular growth they are talking about:

The economy grew a faster-than-expected 0.3 percent in the first quarter as consumer spending, spurred in part by better job prospects, increased at the fastest pace in almost two years.

0.3% in a quarter, that's an annual 1.2%, so if that is "faster than expected" I'd hate to see a really bad reading! And what about this "increase" in consumer spending, as I recall from this post, even Bloomberg itself wasn't clear about this until very recently:

Italian retail sales fell for a third month in May as consumer spending continued to be hampered by rising gasoline prices and tax increases.

Of course it is possible to square the two Bloomberg articles by pointing out that the data on employment - which fell to 6.2% in the first quarter according to today's data from ISTAT - is from the first quarter while the May retail sales are second quarter data, but since we are now in June it does seem a bit perverse - to say the least - to be citing earlier data as proof that things are going well when the later data seem to suggest that they aren't. That's why I call it spin.

Anyway, then we get to the bottom line:

Still, an increase in the number of people who gave up looking for work contributed to the first-quarter decline in unemployment, an Istat spokesman said. While 52,000 fewer Italians were searching for jobs in the first three months of the year on a seasonally adjusted basis, total employment dropped by 59,000, or 0.3 percent, in the quarter.

So despite the acceleration in growth, employment actually dropped during the first quarter. But if this is the case, why the fall in unemployment. Basically I think because Italy is ageing. Essentially we are seeing now a similar phenomenon in Germany (see this post) and Japan (see this post), as median ages rise, more elderly workers leave the labour force, the dependency ratio rises, and unemployment goes down.

More interestingly even as employment tightens in these countries, wages and salaries do not rise significantly. In Germany according to Eurostat Q1 y-o-y wages and salaries rose by only 0.1%, and in Japan they are falling. Curiously the Q1 data for Italy were not available in their final form when Eurostat published their data, but it will be interesting to see if they are now falling in Italy too (at least in real terms).


An English version of the ISTAT data is available here, and I have "lifted" this chart for your convenience:

(please click over image for better viewing)



as can be seen from the seasonally adjusted data employment grew (year on year) by 0.2%, while the labour force declined by 0.9% (and a massive 2.7% in the South where there are of course very few immigrants). So despite something like 300,000 new migrants in 2006, the labour force actually seems to have fallen, if this is the case I find the situation astonishing.