Italy's Low Growth Problem Turns Negative


The Italian economy contracted in the first three months of this year. The ISAE predicts growth will return this quarter, I'm not so sure. I think the problem is endemic, and associated with the particular trajectory of the ageing process in Italy. With France and Germany now both struggling to avaoid deflation, it's getting hard to see how Italy's inflation rate can stay in positive territory for long.

The Italian economy shrank in the first three months of this year, according to official figures. It suffered because of a slump in investment, and a sharp fall in exports as the euro rose in value. The national statistics office, Istat, said the economy contracted by 0.1% from the last three months of 2002 - the first quarterly fall since 2001. Istat was confirming preliminary figures released in May. It said investment fell 5% from the previous quarter, while exports were down 3.5%. Imports also dropped, but their value was almost equivalent to exports. In the previous quarter exports exceeded imports by 2bn euros (£1.4bn; $2.3bn) and Italy's economy grew by 0.4%. The government-funded economic institute, ISAE, has predicted that growth will return in the three months to the end of June. And the government is forecasting growth this year of about 1%. Over the past ten years, Italy has had one of the lowest annual growth rates in the European Union. The euro zone economy as a whole stagnated in the first quarter. Only growth in France and Spain offset contractions in Germany and Italy to keep euro zone growth flat.
Source: BBC News
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Social Unrest Contagion

Morgan Stanley's Vicenzo Guzzo on the probablems of selling pension reform.

In a surprise move, earlier this week, Italian Labor Minister Roberto Maroni opted not to attend the planned meeting with the representatives of the three confederate unions, CGIL, CISL, and UIL. The meeting took place as scheduled, but it was effective downgraded to a technical roundtable with the experts of the ministry, defying the expectations of the unions, which were ready to oppose some of the issues at stake on more political grounds. Since then, events have taken a sharp turn for the worse. Union leaders are now threatening industrial action, which eventually could lead to a general strike. A decision will be taken on May 14. Along the same script played by their French peers (see Showdown in France, May 6, 2003), are the Italian unions about to stage a day of general strike? Is the proposal of a reform of the pension system going to clash with public opinion and shake the foundations of the governing coalition, repeating the painful experience of 1994-95? Will a wave of social unrest once again swamp any restructuring attempt and prove Europe's intrinsic inability to reform? These and several other questions must be crossing the minds of international investors at a time when the Euro economy appears to be pinned between an overvalued currency and restrictive fiscal conditions.

The reform of the Italian social security system pivots on the proposal of channelling future flows of severance payments (known as TFR or 'Trattamento di Fine Rapporto'), currently sitting on the balance sheet of Corporate Italy, into pension funds, enhancing the scope of a second privately funded pillar. Companies, which so far have benefited from this free source of cash flow, worth nearly €13 billion a year, would be compensated by a reduction in social contribution rates of up to five percentage points (dubbed “de-contribution”). Closed funds, whose affiliates belong to a given industry or sector, and open funds, whose subscription is available to all workers, would be subject to the same tax regime. Unions oppose three key points: they argue that any decision on TFR should be left to the worker rather than being mandatory; they are against the de-contribution model; and finally, they think that investment in closed funds should be encouraged through more aggressive incentives.

The government will probably have to make concessions in order to avoid a strike. Social security is a sensitive issue. The memories of the 1994-95 strikes, which eventually led to the collapse of the first Berlusconi government, are still vivid, and the cabinet will want to avoid the road of open confrontation. Yet a 14% pension expenditure-to-GDP ratio, one of the highest among the industrial countries; a stock of public debt well in excess of 100% of GDP; and a fully public-funded pay-as-you-go system together with poor demographic prospects are all compelling arguments for reforms even more ambitious than those currently being debated.

We do not think that the recent events have dented the stability of the government coalition, nor would we interpret them as a sign of a rejuvenated union front whose critical mass could weigh on other hot issues, such as the labor market. True, on June 15 Italian citizens will be asked to cast a vote in a referendum on the famous Article 18, a piece of legislation that up until last year forced large companies to re-hire those employees whose dismissal was regarded as unfair. But the referendum proposal, which goes beyond the original formulation by extending strong labor protection to small enterprises, is likely to fail, lacking the support of CISL UIL and the Democrats of the Left, the largest party of the center-left coalition. Even CGIL, which has always opposed labor market reform, appears split on the vote. The bottom line is that this is not 1995, and unions are far more fragmented than they were at that time.
Source: Morgan Stanley Global Economic Forum
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Why Japan's Slump Matters to Italy

Despite the fact that John Snow was cheerfully informing us earlier this week that 'deflation is a monetary phenomenon', some inveterate doubters remain unconvinced. Yours truly for one: I think this view is nonesense. Fortunately from time to time more signs of intelligent life appear on the planet's surface. I have no idea who Eddie Lee is, or what he thinks about most matters that affect our civilization. But one thing I do know, he has learnt something from what is currently going off in Japan. And another thing I know is that he must have read something from me somewhere along the line: from one 'Eddie' to another, thanks mate.

The Japanese government is widely expected to propose an array of measures to bolster the country's stock market soon. Japanese banks' massive stockholdings leave them extremely vulnerable to stock price falls. The price support operation is viewed as a necessary step to prevent a collapse. Yet, hardly anybody is raising an eyebrow. As a regional policy adviser declared recently: 'I don't think the rest of Asia cares much about Japan any more, does it?' It's a sentiment shared by many in Asia.Who can blame this display of apathy? The country has failed to be an engine of growth for so long that nobody's holding his breath. But for anyone thinking about what the future may look like, you can't ignore Japan. The loss of the Japanese engine of growth has had a deeper impact on the rest of Asia than generally appreciated - not just what might have been, but what can be. And it's the future that is the concern, for Japan may be a foretaste of something that might become a more universal problem.

Japan is the first case of a modern economy afflicted by deflation. The typical response to this situation is to say that Japan is unique; the rest of the world 'is not Japan'. How the Japanese state of affairs came to pass is explained by an unusual combination - protected markets, gross inefficiency and a paralytic government that led to a dysfunctional banking system. These factors strangled the production processes and sank the economy. In one of the first books to predict the downfall of the Japanese economy back in 1992, Japan: The Coming Collapse, Brian Reading described the Japanese economic system not as 'capitalist with warts' but 'communist with beauty spots'. It was doomed to fail because the keiretsu model was designed to eliminate competition for the benefit of powerful corporate interests.

The solution? Most analysts call for reforms to deregulate the economy, as this is cited as the main cause of the malaise. But this argument is not entirely convincing. An economy suffering from inefficiency should be punished by a low rate of growth rather than the protracted recession Japan suffered for much of the past decade. And inflation, rather than deflation, should be the symptom. It isn't that the banks are unable to lend either. Mr Mitsuru Machida, managing director of the Mizuho Financial Group, says the problem is a lack of borrowers: 'Deposit levels have fallen, but our loan assets have fallen even more, especially among corporate clients - we have more cash at hand.'

Increasingly, economists believe that the more pressing problem lies with a lack of demand. Private consumption expenditure in Japan has been falling every year since 1997. It is, indeed, an unusual situation. What makes this problem particularly disturbing is you'd think getting spending going again in an economy is not a difficult task. But Japan hasn't been able to do this. A possible reason lies in the fact that Japan has the oldest population on Earth, with a median age of 41.3. The government estimates that in three years, the population size will actually start to decline. Japan could be the chilling example of what happens when an ageing society meets an economic recession: You can't shake off the slump.

Take the typical case of the median Japanese man. He's probably still paying a mortgage on his apartment whose value has fallen by 40 per cent in the past decade. However, as he had to accept pay cuts to keep his job - the average monthly salary for the Japanese employee fell during the past two years - his mortgage burden has increased. He has one child who is about to go to college, but for the past decade, his savings in the bank earned next to nothing in interest. Given this prospect, he has to save heavily to make provisions for the future. Even retirees like Mr Tomiya Isshiki, 67, won't dare splurge. He's relatively prosperous with a house in the Tokyo suburbs. He's paid off his mortgage and receives a monthly pension. But he says, as quoted in the Asian Wall Street Journal: 'We are all worried about the future, so we have to save.' Economist Edward Hugh points out that reviving demand in an ageing society is an uphill task. For while young societies can face credit-driven expansions, old societies obviously cannot. If Japan is providing a foretaste of the future, then Europe could be next in line. In particular, Italy, Switzerland and Germany have populations with a median age of around 40 years. In the past two years, these three countries averaged just 0.5 per cent growth with rapidly falling inflation rates. So far, little attention has been paid to this predicament because few think it's a problem. That may be slowly changing. Mr Naohiro Yashiro, president of the Japan Centre for Economic Research, is a man concerned about his country's ageing population. He notes: 'The ageing society is not only a matter of the future, but a matter of the present.'
Source: The Straits Times
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More in the Same Vein

Burlusconi admits that the low growth the economy is experiencing limits considerably his room for manoevre. Also don't miss the point about the pensions Maastricht, using the EU as a shield could be just what the local politicians need.

Italian Prime Minister Silvio Berlusconi said yesterday that cutting taxes is a top priority for Italy, but that there was little room for manoeuvre since the economy was growing at a rate of less than one per cent. "We have to take into account the economic stagnation, growth is absolutely contained below 1pc," he said at a conference. "We're adding up the numbers." Italy is officially forecasting economic growth of 1.1pc in 2003. On Friday, Berlusconi said he believed cutting Italy's corporate tax rates would give a boost to the country's lacklustre growth. "I am insisting with Economy Minister (Giulio) Tremonti that we head in that direction, even a little. We'll see what we can do," he said . Italy's corporate tax rate currently stands at about 34pc, making it one of the highest in Europe. The prime minister said the general economic outlook was looking good for 2004."We have to be a little more optimistic about the economic situation after having overcome the uncertainties of the war in Iraq... There will be a robust recovery starting next year."

Berlusconi, whose country takes over the rotating presidency of the European Union in July, has said in the past that the EU's strict core Maastricht economic goals needed to be interpreted more loosely and that the EU should come up with an economic stimulus package for Europe. Yesterday, he reiterated his expectations that new EU rules on pensions would be drawn up during his term, making it easier for governments to enforce unpopular pension reforms without taking too much political heat. "A pension Maastricht will be one of the themes of the Italian EU presidency. At the end of the term we should come out with a European regulatory framework.
Source: Gulf News
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