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?

Thursday, December 28, 2006

Prodi, Prodi, Ay, Ay, Ay

There are a spate of articles on Romano Prodi's resolutions for 2007 these days in the press. In the first place he is telling Italians in no uncertain terms that where you should look for indulgence is not at the Vatican, but at your local tax office:

In the first 11 months of 2006, income-tax revenue increased more than 9 percent to 33.8 billion euros (44.4 billion). The gains came as Prime Minister Romano Prodi committed more resources to chasing cheaters as part of a pledge to end tax evasion in seven years.

Prodi's effort, which aims to generate 8 billion euros in revenue next year in a country where an estimated 100 billion euros of taxes go unpaid each year, may determine whether Italy is able to fend off fines for breaching the European Union deficit limit. It also contrasts with the policy of former Prime Minister Silvio Berlusconi, who raised revenue through tax amnesties -- forgiving evasion for a fee.

``Eight billion euros in such a short time may seem a little ambitious, but there is no doubt that Prodi's government has taken a stance toward evasion that is very different from the previous one,'' said Annamaria Grimaldi, an economist at Banca Intesa SpA in Milan. ``Not passing amnesties and one-offs all the time is already a step in the right direction.''

Now there are two things to be said here. The first is that this years good returns at the tax offices are largely a product of the exceptionally good year the Italian economy has enjoyed, and of the ongoing process of legalization of immigrants, there is no real evidence of any substantial change in attitudes to paying taxes.

The second thing is, of course, to note that a lot of Italy's immediate economic future hangs on turning dream into reality when it comes to improving tax returns. If not, then the ratings agencies will be once more breathing down the Italian government's necks come the end of next summer.

However even before the money is in and counted (assuming it does in the end arrive, which I think is open to doubt) there are already plans to start spending it:

Italian Prime Minister Romano Prodi, staking his political future on his budget, promises 2007 will be the ``year of the turnaround'' and doesn't rule out cutting income taxes to spur the economy.

``I will insist on growth, without which no other objective can be reached,'' Prodi said at his year-end press conference broadcast by state-owned television Rai SpA.

After winning in April the closest election in Italy's history, Prodi has battled with his allies on how to cure Italy's economic woes and had to resort to confidence votes to get the 2007 budget approved. Faced with a slump in popularity, some members of his nine-party coalition already are clamoring to cut income taxes as soon as next year while Finance Minister Tommaso Padoa-Schioppa says the priority must be to cut debt.

Prodi today tried to dodge the thorny subject. Asked whether his government would use higher tax receipts to reduce income taxes, Prodi said: ``First we need to see how consistent this revenue is and once we have established if it's stable, then the government can decide to cut taxes.''

One way to find the resources to actually cut taxes would be to address the issue of reforming the pensions system. So now attention is focused on accelerating the reform process next year, especially with regard to product market de-regulation, and pension system reform:

Italy’s centre-left government will aim next year to make the economy more competitive by cutting the time needed to start up a company and encouraging foreign investment, Romano Prodi, prime minister, said on Thursday.

Setting out his objectives for 2007, Mr Prodi said he would propose reforms before the end of February to the creaking state pension system, but declared that they would not be so harsh as to justify strikes by those workers affected.

Left-wing critics in Mr Prodi’s nine-party coalition have warned they will resist pension reforms that damage workers’ interests. The premier is constrained to heed their opinion because of the government’s tiny majority in parliament’s upper house.

So here are the promises for 2007, now lets go and see what actually happens, but if I could add, for my taste, Prodi is spending far too much time trying to keep everybody happy, and not enough time taking the difficult decisions which undoubtedly have to be taken to secure Italy's future.

Thursday, December 21, 2006

And The Budget IS Passed

I don't suppose this issue had been in doubt in recent weeks, but it is at least one more hurdle over.

Italian Prime Minister Romano Prodi's government survived a confidence vote and passed its first spending package as lawmakers approved plans to cut debt and reduce taxes on low incomes by raising them on higher ones.

The Chamber of Deputies voted by 337 to 262 to pass the budget law. Prodi's government would have collapsed had it lost the ballot because a confidence vote was tied to it.

So now the budget is about to become law. The next step will be to see to extent to which it is effective in achieving its objectives. Standard and Poor's don't seem too convinced:

Standard & Poor's and Fitch Rating cut Italy's creditworthiness on Oct. 19, almost three weeks after the government presented the budget proposal. S&P last week said the budget would fail to cut debt.

The big issue is the extent of dependence on increased taxes and more efficient collection of revenue rather than addressing the structural problems in the spending programme.

Confindustria, perhaps expectedly, are not very convinced either, but I was rather surprised by this:

Italy's largest employers' group, Confindustria, this week said the ``restrictive'' budget would hurt growth next year. Confindustria predicted the economy could grow as little as 1.1 percent after expanding 1.8 percent in 2006. The spending plan will shave 0.3 percentage points from a potential growth of 1.4 percent, the lobby said.

and the following point certainly raised an eyebrow here:

"The deficit may reach 6 percent of GDP this year, up from 4.1 percent in 2005, the government says."

6% of GDP. Well if correct this would certainly explain some of the growth spurt. I haven't seen this number mentioned before, in fact the indications had been the exact opposite, that the deficit would be less than anticipated due to the increased revenue. So is this for real, or is it simply Bloomberg. Anyone out there know?

Consumer Confidence Up Again In December

The only think you can say with any degree of certainty about Italian consumer confidence of late, is that it is volatile. In September it was up, in October it was down, in November it was back up again, and now in December it is way up, to the highest reading since 2002:

Italian consumer confidence leaped in December to a 4 1/2-year high as economic growth accelerates.

The Rome-based Isae Institute's index, based on a poll of 2,000 households, rose to 113.6, the highest since June 2002, from a revised 109.3 in November.

So the Italian consumer coming into xmas is feeling good, and this is encouraging news, but we still need to see what sorts of readings we get going into 2007 before we can decide whether this is a real recovery, or an above trend boom. As readers know, I have my doubts.

One factor which undoubtedly has been influencing the high spirits is the recent employment data:

Italy's jobless rate unexpectedly dropped to a 14-year low in the third quarter after companies hired more part-time female staffers and foreign workers were legalized.

The unemployment rate fell to 6.8 percent from a revised 6.9 percent in the second quarter, the Rome-based National Statistics Office said in a statement today.

Of course this is data from the third quarter so there is no necessary match with confidence in December, but it would appear from the confidence level that the positive employment trend continues.

In part the improved employment situation seems to come from more part-time female labour being employed, and in part it seems to come from an inward flow of migrants, with the numbers of migrants being employed rising by 13.6% year-on-year (to a total now of 1.5 million).

But before we all start to cheer too loudly, we should think about this:

"Growth in Italy's $1.8 trillion economy will slow to 1.4 percent in 2007 after expanding 1.7 percent this year, according to the latest forecast on Nov. 6 by the European Commission. This compares with the 2.6 percent growth rate of the thirteen countries sharing the euro, and puts Italy on track to lag its partners for an 11th year in 2007."

So even though growth in Italy has improved markedly this year, it still doesn't seem to have gone above 1.7% and the relative position in growth terms of Italy in the EU seems unchanged.

Tuesday, December 19, 2006

What Are The Christian Democrats Up To?

A couple of weeks ago I had this post on the decision of the Christian Democrats to separate themselves off from the Berlusconi opposition. In the course of that post I suggested:

it is hard to see just how genuine and realistic Casini's initiative is, but if it does move forward it is, of course, just the kind of thing Italy needs. This move would seem to have two consequences.

Firstly Prodi's coalition suddenly becomes more governable, since the majority is now no longer necessarily a wafer-thin one. Also Prodi is now so dependent on the left of his coalition. This may become important as we move into 2007.

Secondly in the longer run this may provoke a 'realignment of the centre'.

Subsequently I have received a couple of interesting mails from Manuel Alvarez-Rivera (who runs the more than useful Election Resources site).

Manuel draws attention to two points of current interest in the Italian political situation:

1/ The Electoral Ballots Recount Issue (see here)

A second partial vote recount was ordered on Thursday amid claims that Italy's hard-fought and extremely close general election last April was marred by vote rigging.

The election committee in the lower house of the Italian parliament decided that all the House votes - blank, contested, spoiled as well as the good ones - should be counted again in 10% of polling stations.

On this Manuel is duly skeptical:

I'm somewhat skeptical as to the fraud claims on account of the significantly lower invalid vote figures, for a couple of reasons.

First, the decrease in the number of invalid votes could be explained by mechanical factors such as a simplified voting procedure, and most importantly political factors. To be specific, given the momentous choice between Berlusconi or Prodi, many Italian voters might have concluded it was no time to waste their votes by spoiling them or casting them blank.

Second, the 2006 invalid poll is by no means unprecedented: in both relative and absolute terms, the figures are almost identical to the corresponding totals for the 1976 election, which was a momentous choice as well, between the Christian Democrats and the Italian Communist Party (PCI). In light of the latter fact, it would seem to me that either those making the fraud claims weren't aware of this, or that they were but decided not to let a pesky fact get in the way of a sensational story.

Incidentally, if last April's Senate election in Italy had been carried out by straight PR (that is, without regional majority prizes), the overall distribution of seats would have been identical to that obtained under Italy's current electoral system. The reason for this is very simple: in eleven of the seventeen regions with PR + majority prize, the winning coalition won by itself more than 55% of the seats, and no majority prize was awarded. Meanwhile, the remaining six regions were evenly split between Berlusconi and Prodi, and as it happened the majority prizes awarded in these (which in all cases amounted to just one or two extra seats per region for the winning group) cancelled each other out. In all, the whole thing turned out to be yet another Berlusconi electoral scheme that didn't quite work out as planned.

Now there's going to be a partial recount for the Chamber election as well.

The center-left - which agreed to the recount - appears wholly unconcerned: they feel (quite correctly in my humble opinion) this is a tempest in a teapot, and that little if any changes in the results are going to come out of it. Not surprisingly, Berlusconi expects the outcome will be overturned, insisting once again he really won the election, Prodi's government is illegitimate and all the usual nonsense.

2/ Political Realignments in Italy

Manuel has this to say:

Concerning political realigments, here's a very interesting link (in Italian).

At any rate, I agree completely with your assessment of the situation. I wouldn't be surprised if the UdC were to find its way into Prodi's government, although it would be a hard sell for the far left, all them more so given the right-wing tendencies of some UdC leaders - such as Rocco Buttiglione. Moreover, right now Prodi can't afford to lose the Refounded Communists in favor of UdC, since such a move could cost the government its fragile Senate majority.

In Italy it is said the Christian Democrats have the uncanny virtue of never being too far from the centers of power, so it will be interesting to see what happens. Incidentally, Mastella and Casini used to be close allies a few years ago, when both led one of the UdC's preceding parties, the CCD.

My gut feeling is that it's no coincidence that the UDC left the House of Freedoms just days after Berlusconi's fainting spell. Casini et al have probably come to the conclusion that the days of Silvio Berlusconi as a major political figure are numbered, and that without him his party (which acts more like a Fininvest company than a real political party) may collapse altogether. Since a good many of Berlusconi's Forza Italia voters are former Christian Democrats, it would make sense that if such an event comes to happen, many Forza Italia's voters would gravitate towards a centrist alliance dominated by (who else?) the Christian Democrats.

Global Insight's Italy Forecast

Paola sent me the Global Insight forecast for Italy which is worth the read.

The general story is already a reasonably well known one:

Italy’s economy continued to strengthen in the third quarter of 2006, although it was primarily due to a steep inventory build-up, according to a final estimate from the statistics bureau, ISTAT. Real GDP grew by 0.3% quarter-on-quarter (q/q) after having risen 0.6% (upwardly revised from 0.5% q/q) in the second quarter of the year. The economy performed as expected, and thus Global Insight still expects real GDP to grow by 1.7% in 2006, its strongest performance since 2001. The annual comparison was still solid, with real GDP rising by 1.7% year-on-year (y/y), unchanged from the second and first quarters of 2006.

They do however pick up the inventory issue:

The breakdown of GDP by expenditure revealed that solid consumer spending growth and a sharp rise in inventories were the major growth drivers in the third quarter, which offset a large drag from net exports. A marked rise in inventories boosted the overall q/q growth rate by 1.3 percentage points in the third quarter. We believe that the increase in stocks was not deliberate, and was probably the result of lower-than-expected export sales in the third quarter. This could imply a downwards correction in inventory levels in the final quarter of 2006 that would dampen overall economic growth to just 0.1% q/q from the reported 0.3% q/q in the third quarter.

In particular part of the inventory issue obviously exists in the automobile sector, where sales actually declined in the third quarter year on year (even if Fiat did increase its market share):

Retail sales were relatively subdued in the third quarter, while demand for new cars weakened. Indeed, the average level of new registrations contracted by 5.6% y/y in the third quarter, after having climbed 6.8% y/y in the second.

The rise of the euro has clearly been taking its toll:

Net exports weakened significantly, lowering the overall GDP quarterly growth rate by 1.0 percentage point in the third quarter, after making a welcome positive contribution in the first half of 2006. Exports of goods and services contracted 1.7% q/q (but were still up by 3.3% y/y) in the third quarter, after rising very healthily in the first half 2006. The decline in export sales was partly a technical correction after several quarters of strong growth and the result of the steady appreciation of the euro, which has strengthened from an average of US$1.20 in the first quarter to US$1.27 by end-September. A stronger euro hits the Italian export sector hard, making it more difficult to compete with low-cost producers in Eastern Europe and the Far East. Italy specialises in highly price-elastic goods, notably clothing and footwear, as well as capital equipment. In the first half 2006, Italian export sales had been lifted by the relatively healthy global growth and stronger demand across the Eurozone, coupled with the markedly softer euro in the second half of 2005 and the first quarter of 2006. Meanwhile, growth in imports of goods and services strengthened from 0.2% q/q and 3.2% y/y in the second quarter, to 2.1% q/q and 5.4% y/y in the third quarter, reflecting firmer consumer spending.

Strangely there is relatively little discussion in the forecast of the budget deficit situation and the ongoing fiscal tightening that will be required. Juts this bried comment:

The fallout from the 2007 budget process is expected to have a negative impact on both growth and already fragile consumer confidence. The higher tax burden for top income earners and the unpopularity of the 2007 budget will continue to hurt consumer confidence well into 2007. It is likely that some cautious consumers could choose to save rather than spend the additional disposable income as they expect the economy to stumble again, while believing that additional fiscal tightening measures are inevitable.

In contrast the economists over at Global Insight have clearly bought the rise-and- rise euro story, and see this having a much more considerable impact on Italian growth than the fiscal restraint:

Real GDP growth is expected to fall back to 1.3% again in 2007, before accelerating gently to 1.4% in 2008. The slowdown will reflect the prospect of the euro making substantial gains against the U.S. dollar in the vicinity of US$1.40 by the end of 2007 and US$1.48 by end-2008. Consequently, export growth is projected to fall sharply in 2007 and remain subdued in 2008.

Really I think these numbers are way too high, and as we can see the euro is already starting to fall back from the recent highs. Obviously over at Global Insight they would do well to read Claus Vistesen a bit more often. And those who are already reading Claus regularly, might enjoy this post from James Hamilton, who is in many ways saying something similar.

Sunday, December 17, 2006

Made In Italy At Chinese Prices?

New Economist has a post linking to a recent paper by Francesco Daveri on Italian productivity, and by this somewhat circuitous route (being directed by a comment towards a blog called Business Hackers on my way) I found this article in Spiegel Online about how the arrival of Chinese migrants was changing the face, and economic substructure, of Prato:

Outsiders have long since made their way into home to 2,000 Chinese entrepreneurs and an army of low-wage workers, 25,000 strong, which is growing rapidly in front of the walls of this small city of 180,000. One in five of the workers is undocumented and, officially at least, isn't even here. Meanwhile Prato's citizens look on and curse their new neighbors as sewing machines rattle through the night.

Prato's residents call the immigrant neighborhood, which has grown rapidly in the last five or six years in an area once inhabited by local factory workers, "San Pechino," or St. Beijing. When the first Chinese, their suitcases filled with cash, arrived in the early 1990s and leased their factories, the Italians laughed at them. But now that their numbers have quadrupled and they own a quarter of the city's textile businesses, where they make "Made in Italy" fashion at "Made in China" prices -- often illegally -- the newspapers are full of op-ed pieces about the "yellow invasion," low-wage competition and the Chinese mafia. The president of the city's chamber of commerce, who also happens to own a textile business, says: "We underestimated them. What they're doing here is called unfair competition. We need a battalion, an operation like the one in Iraq, to keep them under control."

Prato's residents are now frantically asking themselves questions to which they have no answers. Who are these Chinese? What is their objective?

continue reading Spiegel online

Well placing carefully to one side the paranoia which seems to be revealed by the last sentences, what I find slightly worrying about the situation brought to light in this article is the way some parts of the Italian economy seem to be sliding down the value chain, just as China itself is starting to move up it. Expanding activity in this kind of manufacturing industry is a dubious enough thing to do with global prices as they are in any event, but doing so by allowing the needs of the tax system to support the spending demands of the elderly population to be flouted in just this kind of way is quite another.

There is considerable evidence for the existence of this kind of activity here in Spain too (and I imagine in Greece). But really bringing in undocumented workers to create work which would otherwise be unprofitable (and note that I support inward migration where it has some kind of rationale) seems to be a more or less pointless activity. At best you are renting the land to allow your overseas competitors to get even nearer their market of interest.

In the long run none of this has much future, since as I say, this kind of activity is simply not cost effective in Europe any more, and all it does is create unnecessary resentment among ordinary Italians who cannot understand what the hell is going on.

One example of where all of this can lead is to be found in the Spanish town of Elche (in the Community of Valencia):

The Chinese community in Spain has not yet forgotten the events that took place in Elche, Europe's shoe capital, on September 16, 2004.

That night, a group of Spanish shoemakers set on fire the factories of Chinese entrepreneurs. Local shoe industry workers say the Chinese competitors were playing dirty by offering cheap products distributed in Spain and the rest of Europe but manufactured across the world. Those criticisms, not limited to Spain or the shoe industry, clearly illustrate concerns in Europe with cheap Chinese products.

Now what seems to be happening is that attempts to contain the flow of products by the use of quotas are being got round by renting land and premisses, and importing workers to do the production within the EU. All of this is very difficult to control since, as China Economic Review notes, it is taking place in areas where a blind eye has traditionally been turned to underground economic activity, and it is now virtually impossible to start having an 'eyes wide open' policy overnight, too many other people might be 'found out' at the same time:

Elche, in the east of Spain, is close to Valencia and not far south of Barcelona. It is a city of 200,000 people that has lived for decades on the returns from its shoe industry. For most of this time, it has been known as a place that lives outside labor and tax laws. Employees have often worked illegally without fixed salaries or social security.

Half a century ago, US shoe companies moved their production there, only to transfer it later to markets with even cheaper labor such as India, China and Vietnam.

Invaded by migrants from all over the world (mainly South America, Eastern Europe and Sub-Saharan Africa), European societies are not coping well with change. Europe's economies are struggling to overcome the structural challenges derived from the WTO's Agreement on Textiles and Clothing. In some cases, manufacturers don't even need to move production to China. Chinese workers will work in the heart of Europe for a fraction of the wages European workers demand.

In Elche, Chinese shoemakers have set up warehouses and sell shoes at one tenth the price of locally made products.

Now to be clear, my beef here is not about immigration. My beef is about a degenerate application of public policy and how it always ends up acting against everyone's interests in the long run. We need migrants here to do work with a real economic basis behind it (to meet our man- and woman-power shortages and to help pay our health and pensions system) but, frankly, we don't need this, unless, that is, the respective local councils and governments are willing to pay the retraining costs of these soon to be displaced workers, once the regulations are applied and the no-longer profitable enterprises closed.

Naturally I will post on the somewhat more interesting arguments from Francesco Daveri on Italian productivity (the real variety) under separate cover.

Tuesday, December 12, 2006

Industrial Production Rebounds in October

Following the 1% decline in September industrial production rebounded in October, and was up 3.7% year on year:

Italian industrial production rose in October for a second month in three on stronger demand for consumer goods such as washing machines and clothing.

Production rose 0.6 percent from September, when it declined 1.0 percent, the national statistics office Istat said today in Rome.

Production of durable goods for consumers rose 1.3 percent in the month, and output of food and beverages jumped 3.5 percent, while clothing production gained 3.7 percent from a month earlier, today's report showed. Production of automobiles gained 15.4 percent in October from a year earlier, Istat said.

But watch out for the future:

The appreciation of the euro may weigh on demand for EU exports in the coming months, slowing growth in 2007. The euro has gained 12 percent against the dollar this year, climbing to $1.3367 on Dec. 4, the highest since March 2005.

New Immigration Law In The Works

Just following on from the previous post about the role of immigrants in Italian GDP growth it is interesting to note that Welfare Minister Paolo Ferrero has announced that the government is working on the draft of a new law which would be more coherent with Italy's growing need for and increasing dependence on immigrants:

Italy should have a new immigration law before summer, relaxing restrictions adopted by the previous centre-right government, Welfare Minister Paolo Ferrero said on Thursday.

Speaking after a meeting with local authorities and immigrant associations, he explained that his department, together with the interior ministry, had nearly finished drafting the bill. "The measure should start its passage through parliament in January and be finalized by spring," he said. The law would relax restrictions introduced by the government of former premier Silvio Berlusconi in 2002.

"There are many reasons for changing this old law," said Ferrero. "One of them is the long time it takes to issue residency permits [...] The waiting period can be endless". The 2002 law has also been criticized for the fact that only foreigners with an Italian work contract are allowed a residency permit. Residency permits last just two years and if immigrants lose their job before the expiry date they are required to leave the country.

Ferrero said that one of the most important ideas under consideration was doubling the residency permit's two-year duration. "Part of the idea is to reduce the amount of work involved, which is pointless if the person applying for the permit is legal and has all the necessary prerequisites. "Increasing the length of the permit will reduce the number of requests that need to be dealt with".

Other legislative changes under discussion include the introduction of a single asylum law and a points-based entry system to encourage managed migration. Proposals are also being drawn up to grant certain immigrants the vote and make it easier for them to gain Italian citizenship. Meanwhile another major change, involving the way residency permits are issued, is in the process of being implemented. This transfers authority to grant residency permits from the hands of the police to the control of local municipal authorities.

Immigrants and Italian GDP Growth

Looking for something else I just stumbled across this:

Italy’s 3.6 foreign residents are an added asset to the country’s economy and their labours account for 6.1% of its GDP, some 86.7 billion euros in 2005, according to a new report.

Published Monday in the authoritative financial daily Il Sole 24 Ore, the report pointed out how Italy’s immigrants were responsible for “keeping the nation from suffering two heavy recessions in recent years”.

Without their contribution, Il Sole explained, “Italy’s GDP would have fallen by 0.1% in 2002, 0.6% in 2003 and 0.9% in 2005.

Almost 2.1 million immigrants hold regular jobs and they totally dominate the domestic services sector, accounting for 80% of the sector’s contribution to the country’s GDP to the tune of 9.6 billion euros.

Immigrants play an even bigger role in the services sector contributing 37 billion euros to the nation’s wealth, equal to 4.3% of the sector’s GDP.

According to the report, the contribution immigrants make to the economy has been growing constantly.

From 1993 to 2000, GDP rose 15.4% in real terms, but this would have been 13.5% without immigrants, Il Sole calculated.

In the following five years, GDP rose by 3.2% “of which 3.1% was thanks to the work of immigrants. This is equal to 96% of the increase,” the study concluded.

The data presented here is fascinating. The picture is pretty similar in Spain, although since Spain's population ex-immigration isn't actually falling all we can say is that Spain's economy has risen substantially more than it would. Any Il Sole reader (Paris??) out there know what the actually study they are referring to was, and where it is to be found?

I suppose I don't need to ram this point home, but it does rather confirm my argument that those countries with ageing populations who cannot attract immigrants will actually see GDP shrink at some stage.

Wednesday, December 06, 2006

November Retail Sales Don't Look Good

Despite the fact that the November retail sales data across the euro region is quite positive, sales in Italy declined when compared with October:

Italian retail sales fell for the second month in November as the government's plan to raise income taxes curtailed spending.

An index of retail sales stood at a seasonally adjusted 48.0 compared with 47.4 in October, according to a survey of 440 retailing executives compiled for Bloomberg LP by NTC Economics Ltd.

Remember that on all these indexes any reading below 50 signals a contraction.

Italian consumers are facing a double whammy as the ECB raises rates at the same time as the government is set to considerably raise taxes (rather than cut spending) to address the deficit problem. Thus Bloomberg:

The higher taxes are hitting Italian consumers at a time that interest rates are also rising, making consumer loans and mortgages more costly.

As they suggest this contrasts with the eurozone sales data:

The drop in retail sales in Italy contrasts with increases in Germany and France. Sales in both those countries rose, lifting the European index to a record high.

Retail-sales growth accelerated in the euro region for a third month in November, giving the European Central Bank more scope to raise interest rates next year, the Bloomberg purchasing managers index showed.

An index of retail sales in the economy of the dozen nations sharing the euro rose to a seasonally adjusted 53.7, the highest in four months, from 52.8 in October, a survey of more than 1,000 retail executives compiled for Bloomberg LP by NTC Economics Ltd. showed today.

Of course rising interest rates also mean a rising euro, and this will also have an impact on Italian exports, although the extent of this impact still remains to be seen.

Paris is looking on the bright side of things, and points us to the latest data on public finances. There is no doubt that 2006 has been an exceptionally good year by Italian standards, but can we be so optimistic for 2007?

Negli ultimi documenti governativi di politica economica - la Relazione previsionale e programmatica per il 2007 con l'annessa Nota di aggiornamento al Dpef - il deficit pubblico stimato per il 2006, al netto dei debiti pregressi legati ai rimborsi Iva sulle autovetture e alla Tav/Ferrovie, si ferma al 3,6% del Pil, rispetto al 4,0% indicato nel Dpef 2007-2011 presentato in luglio e al 4,1% realizzato nel 2005

However if we look at the details we find:

Il miglioramento dei conti proviene quasi tutto dal lato delle entrate tributarie; il gettito fiscale è aumentato, infatti, nel corso di quest'anno in misura ben superiore alle stime iniziali. Nella Relazione trimestrale di cassa di aprile, ultimo atto ufficiale del governo uscente, le entrate tributarie totali erano calcolate in 407 miliardi di euro. Tre mesi dopo, il Dpef alzava la stima a 417 miliardi, che il recente aggiornamento ha portato a 435 miliardi.

A large part of this has undoubtedly come from the exceptionally high growth (again in Italian terms) seen in 2006 (a year which has, after all, broken all global records). If this expansion in receipts is not maintained in 2007, however, the position may once more deteriorate, so there is really no room for complacency here.

Christian Democrats Leave Berlusconi

Now this is interesting news:

The lines of political battle were redrawn in Italy on Tuesday after a prominent opposition politician withdrew his party from the centre-right coalition led by Silvio Berlusconi, the former premier.

Pier Ferdinando Casini, the most powerful figure in the centrist Christian Democratic party (UDC), said Mr Berlusconi’s House of Freedoms coalition, which ruled Italy for five years until last April’s general election, had no future. Mr Casini, 51, is a former speaker of parliament’s lower house whose ambition is to create a “new centre” in Italian politics that would bring together moderate reformist forces from right and left and give Italy more stable governments.

From this distance it is hard to see just how genuine and realistic Casini's initiative is, but if it does move forward it is, of course, just the kind of thing Italy needs. This move would seem to have two consequences.

Firstly Prodi's coalition suddenly becomes more governable, since the majority is now no longer necessarily a wafer-thin one. Also Prodi is now so dependent on the left of his coalition. This may become important as we move into 2007.

Secondly in the longer run this may provoke a 'realignment of the centre'. The first whiff of this can already be seen:

At least one party leader in Mr Prodi’s centre-left coalition has already welcomed Mr Casini’s action. Clemente Mastella, justice minister, who has often argued in favour of a “new centre”, said his Popular-Udeur party and the UDC should form a pact and fight side by side in the European Parliament elections of 2009.

Tuesday, December 05, 2006

EU Services Continue To Expand

Latest data across the EU suggest that the services sector is expanding at a slightly more rapid pace:

Growth in European services industries, the biggest part of the economy, unexpectedly accelerated in November, prompting speculation the European Central Bank will keep raising interest rates next year.

Royal Bank of Scotland Group Plc said today its services index, which accounts for about a third of the economy and covers industries such as telecommunications and banking, rose to 57.6, a four-month high, from 56.5 in October.

Of course the composite figure hides a fair degree of country level difference. French services, for example, continued to expand, but at a slighly slower rate, whilst the rate of expansion in Italy accelerated:

Doppia sorpresa positiva dal Pmi servizi. L’indice elaborato da Rbs/Ntc intervistando i direttori agli acquisti delle imprese del settore, è salito novembre sia in Eurolandia che in Italia oltre le attese del mercato.

Nella zona euro, l’indice è passato a 57,6 a novembre dai 56,5 di ottobre, raggiungendo il livello più alto da luglio. Anche in Italia l'indice, predisposto da Rbs/Adaci, ha accelerato passando da 54,1 a 56,2, livello massimo da agosto, superando le attese degli economisti (54) e restando saldamento sopra la soglia dei 50 punti che separa contrazione da espansione. Bene anche il dato tedesco che è cresciuto da 54 a 56,8 mentre in Francia è sceso da 61 a 58,8.

Thanks to Paris for the link.

(Any reading above 50 on these indexes constitutes expansion).

Tuesday, November 28, 2006

Padoa-Schioppa Ups The Growth Forecast

Finance Minister Tommaso Padoa-Schioppa has just forecast 2% growth for the whole year 2006. After a slowdown to 0.3% in the third quarter (which may, of course, be about to be revised upwards) it seems he is expecting some real heavy lifting in the fourth quarter. We will see.

``The economy is recovering,'' Padoa-Schioppa told reporters after a meeting of euro-region finance ministers in Brussels. ``The problem is for that to turn into growth. That is something that lasts for years and not something that lasts just one economic trend.'' Padoa-Schioppa forecast growth to near 2 percent in 2006.

Italy's latest growth forecast had indicated the $1.8 trillion economy would expand 1.6 percent this year and 1.3 percent in 2007. Italy has lagged behind the average growth of its euro region partners for more than a decade and will continue to do so through 2008, according to the European Commission.

OECD Forecast Italy To Miss Deficit Target in 2007

In many ways this news is not exactly surprising, given the debate which has already taken place on the topic. The important question is likely to be, if the OECD are proved right, what will be the response from Moody's, Standard and Poor's and the other sovereign debt ratings agencies? The OECD take the view that:

Italy will fail to bring its budget deficit below the European Union ceiling for the fifth consecutive year in 2007, the Organization for Economic Cooperation and Development said.

Italy's deficit will reach 3.2 percent next year, the Paris-based organization said in its twice-yearly forecast. Prime Minister Romano Prodi's government is trying to approve a budget bill that aims to cut the deficit to 2.8 percent next year, below the EU's 3 percent ceiling for the first time since 2002.

The OECD faulted Prodi's budget for relying too much on increased revenue rather than spending cuts to tame the deficit, a criticism which led to the downgrade of Italy's creditworthiness by Standard & Poor's and Fitch Rating's last month. The budget includes 35.4 billion euros ($46.5 billion) in spending cuts and revenue-raising measures; a third of that amount will come from fighting tax evasion.

``In Italy, the fiscal adjustment is entirely due to higher taxes, with no serious attempt to cut spending,'' the OECD said in the report.

This last part is indeed a damning indictment.

We also need to take into account downside risk on the growth forecast, if the actual environment next year turns out to be harsger than many are imagining at present:

Growth in Italy's economy will slow next year to 1.4 percent from 1.8 percent this year, the OECD said. Europe's fourth-biggest economy will grow at around 2 percent this year, the fastest pace since 2000, Finance Minister Tommaso Padoa- Schioppa said yesterday.

Thursday, November 23, 2006

The Future of Young People In Italy

Following up on my earlier post about the problem of graduate out-migration from Italy, Roberto has drawn this Time magazine article to my attention. I really like the photo since somehow it draws attention to that combination of the old and the new which, if people only could find the way to work with it, could serve as a basis for moving things forward in Italy. A nice crisp winter's morning, just like we have in Barcelona today.

Growing up, Italian teenagers learn the tale of Giotto and the fly. As a young apprentice in 13th century Florence, the aspiring painter sketched a fly on the nose of a portrait his master-teacher Cimabue was finishing. So lifelike was the insect that when the elder painter returned to the studio, he repeatedly tried to swat it off the canvas. Realizing he'd been fooled by the bravura talent of his pupil, Cimabue told him: "You have surpassed your teacher." Thus encouraged by his master, Giotto went on to revolutionize Western painting, and posterity regards him as the man who launched the Italian Renaissance.

Fast-forward to Italy 2006, and the image of the precocious apprentice has been replaced by a humbler figure: the underemployed 30-something despondent about the present, let alone the future. Today's Italy is defined by stories like that of Vincenza Lasala. At 32, four years after graduating with honors in mechanical engineering, she is living with her parents in the same house where she grew up. She has sent more than 200 résumés to large corporations and small companies around the country, but all she has managed to secure are a handful of part-time stints, unpaid internships and training programs. From her home in the sleepy southern town of Avellino, near Naples, a frustrated Lasala speaks for much of Italy's younger generation: "Without a job, my parents are basically still in charge of my life. After all my studying, I don't see the fruits of my effort. Right now, I can't even envision my future."

Business Confidence Drops

Italian business confidence declined in November, hardly dramatically - to 96.8 from 97.1 in October - but the outlook for the Italian economy over the next three months fell to minus 9, the lowest in at least nine months. My feeling is that people have been much too focused on this years good results and have not given sufficient attention to the situation moving forward which will be all important in determining how successful the Prodi government is in addressing the government deficit problem.

Italian business confidence fell in November on concern that a global economic slowdown would hurt exports and crimp growth in Europe's fourth-largest economy.

The Isae Institute's confidence index fell to 96.8 from 97.1 in October, the state-funded research center said today in Rome. The reading matched the median forecast of 24 economists surveyed by Bloomberg News.

``The slowdown in the U.S. is a concern, given that there's no balance in the Italian economy,'' said Robert Perry, an economist at 4Cast Ltd. in London. ``As foreign demand fades, the question is, are there sufficient domestic drivers to keep it going?''

The U.S. economy, the world's largest, expanded at the slowest annual pace in more than three years in the third quarter, weighing on European exports. France's economy stalled in the third quarter and Germany grew less than economists' forecasts, threatening to crimp growth in Italy, which has lagged behind the euro-zone for a decade.

``Expectations fell this month for production levels, but also for the prospects for the Italian economic situation,'' Isae said in today's report. An index measuring the outlook for the Italian economy over the next three months fell to minus 9, the lowest in at least nine months.

Wednesday, November 22, 2006

Consumer Confidence Index Rises in November

Italian consumer confidence rose in November. As can be seen from previous posts (and this one) the index is bobbing up and down, but it is still below the September high.

The Rome-based Isae Institute's index, based on a poll of 2,000 households, rose to 109.2 after falling to 108.6 in October. The reading beat the 108.8 median forecast of 18 economists surveyed by Bloomberg News.

``Growth has had quite a bounce-back this year and there will be some effect felt by consumers,'' said Robert Perry, an economist at 4Cast Ltd. in London. ``The headline unemployment numbers will also be comforting.''

Italy's economy is set to expand 1.7 percent this year, the fastest growth in five years, after stagnating in 2005, according to the European Commission. Italy's jobless rate fell to the lowest in more than 14 years in the second quarter, according to the latest available data.

Consumers are ``less concerned about the outlook for the labor market,'' Isae said in today's report. The employment gains helped increase optimism about consumers's personal economic situation and that measure rose to 115 from 113, Isae said.

Now it is very important to bear in mind at this point that part of the improvement in the labour market situation is due to a tightening in the labour market due to Italy's labour supply constraint as the population ages (as argued in this post), and in part this is one of the worries at the ECB, and one of the reasons that they are set on raising rates, which, from Italy's point of view is a far from perfect outcome. Remember Italy needs to keep the economy growing to maintain any sort of sustainability in public finances.

The Italian Brain Drain

Here is the abstract of a paper on the out-migration of graduates phenomenon I mentioned in my last post.

How Large is the “Brain Drain” from Italy?
Sascha O. Becker, Andrea Ichino, Giovanni Peri

Using a comprehensive and newly organized dataset the present article shows that the human capital content of emigrants from Italy significantly increased during the 1990’s . This is even more dramatically the case if we consider emigrating college graduates, whose share relative to total emigrants quadrupled between 1990 and 1998. As a result, since the mid-1990’s the share of college graduates among emigrants from Italy has become larger than that share among residents of Italy. In the late nineties, between 3% and 5% of the new college graduates from Italy was dispersed abroad each year. Some preliminary international comparisons show that the nineties have only worsened a problem of ”brain drain”, that is unique to Italy, while other large economies in the European Union seem to experience a ”brain exchange”. While we do not search for an explanation of this phenomenon, we characterize such an increase in emigration of college graduates as pervasive across age groups and areas of emigration (the North and the South of the country). We also find a tendency during the 1990’s towards increasing emigration of young people (below 45) and of people from Northern regions.

Tuesday, November 21, 2006

La Febbre

Last week I had the pleasure of seeing Alessandro D'Alatri's recent film La Febbre. As the reviewer says, this is a 'normal' (everyday) film, not a great one, even if there are one or two memorable moments, like the scenes by the river, which were (and I imagine this is not entirely unintentional) rather reminiscent of some to be found in the unforgettable L'Albero Degli Zoccoli from that giant of Italian cinema Ermanno Olmi.

La febbre è il classico film italiano, che vuol raccontare una storia normale, di tutti i giorni, e che per farlo non trascende dai canoni della buona creanza del plot, e da quel pizzico di amara critica sociale che lo rende molto politically correct. D'Alatri infatti sceglie una storia senza picchi emozionali o visivi, con risvolti e situazioni tipiche per un certo tipo di cinema, affrontando il tutto con una messa in scena scanzonata e senza pretese.

On the aesthetic level the film is perhaps far from satisfactory, since D'Alatri seems at times unable to make up his mind whether he is Rosselini or Almodóvar but this is not my principle concern here. The film narrates the 'little story' of Mario Bettini:

La storia dell'impiegato Mario Bettini, geometra comunale come si definisce nel film, passa così tra luci e ombre attraverso gli amici, il sogno di aprire un locale, il posto fisso, la mamma e il fantasma del padre e il grande amore di una vita.

Well, almost an everyday story in an Italian context I would say, but what interests me here is the situation of Mario as a young person who wants to succeed, and all the trials and problems which are thrown in his path by a system which doesn't understand him, and which seems happier to see him fail than to see him succeed. THIS is one of the big problems facing Italy today. And it is reflected in the large numbers of young qualified people who leave Italy every year.

There is one very memorable moment in the film, the one where Mario gets to meet the Italian president. The scene takes place in Mario's bar, which he finally manages to get the permit to open thanks to the fact that the local mayor needs his help in the context of the president's visit. Mario offers the president a drink, una birra is the reply, una birra Italiana, è bella la birra Italiana. So Mario serves the drink, and then tells the president there is something else he would like to give him, and out of his pocket he whips his Italian passport: "here, this is for you, I don't need it or want it" (or words to that effect).

Now here, although to the point in terms of sentiments, D'Alatri hasn't quite got it right. There are currently an estimated 3.5 million Italians living and working outside Italy (to go by the AIRE database), but one thing they do seem to keep is their Italian pasport, since it is this document which enables them to move.

The point I would like to draw attention to here is the substantial loss of future human capital which Italy is undergoing at the present time. Back in 2002 the website Lavoce published an article on this topic. As they say throughout the 1990s there were a growing number of Italian graduates leaving Italy:

La fuga dei laureati italiani all'estero è un fenomeno di cui spesso si discute senza l'appoggio di dati significativi. Analizzando i flussi di laureati italiani che vanno all'estero il fenomeno appare drammatico e in crescita. Mentre all'inizio degli anni '90 meno dell'1% dei nuovi laureati emigrava all'estero, alla fine degli anni '90 circa il 4% dei nuovi laureati lascia l'italia.

During recent years this situation has surely only accelerated. They also publish comparative data for migration of graduates into and out of a number of other EU countries. Unfortunately this data is now somewhat old and it would be really interesting to see something from, say, 2005. My feeling is that the position has only deteriorated. Paola in an e-mail suggests the following:

It is difficult to differentiate between people who are first, second and third generation Italian. However, in terms of first generation Italians leaving the country: I found that since 1990 every year 4% of people who hold a bachelor's degree move out of the country to find job elsewhere; to this number you need to add some people who went to work elsewhere after high school, and MANY young people who did not register to AIRE (Association of Italians residing elsewhere) -therefore the government has no idea they are working somewhere else ... Could we estimate an average of 6% of the average yearly birth for people between the ave of 20 and 45 years old are leaving the country?

Now this situation is important, and especially in the context that Italy's population has not been replacing itself since the early 1990s (ISTAT, latest data, PDF link). There is only continuing population increase in Italy these days due to inward migration. But, as the Lavoce article stresses the balance in human capital terms is hugely negative here. That is to say, this inward migration is extremely important in labour force terms but can only serve to make the path of the Italian economy sustainable if the young educated Italians stay and enter the labour force in more productive, higher value activities. It is here that the big problem exists (and this is not only a problem for Italy, since as I explain in this post here, the phenomenon is similar for Germany. And of course, Italy and Germany are the two European societies with the highest median ages, something whose economic importance I try to explain here).

So the position is a very worrying one. Anyone with anything to add on this, either anecdotally or in terms of more data and links, please feel free to go ahead in comments.

Budget Agreed in the Chamber of Deputies

I should have posted on this earlier. Now the haggling it seems moves over to the Senate.

Italian Premier Romano Prodi won a key confidence vote in the Chamber of Deputies Saturday night on the center-left government's planned 2007 budget, which included heavily protested tax increases and spending cuts.

Prodi's government decided earlier in the week to put the measures to a confidence vote in a bid to overcome harsh opposition that has slowed its passage in Parliament.

The coalition has a comfortable majority in the Chamber and won the vote 331-231. If the government loses a confidence vote, it has to resign.

The budget, which must be approved by the end of the year, had been bogged down by hundreds of proposed amendments and a filibustering opposition during nearly two months in the lower Chamber of Deputies.....

A tougher challenge could come if the government is forced to call for a confidence vote when the budget is later examined by the Senate, where the center-left has a slim one-seat majority.

Monday, November 20, 2006

Eni and Gazprom

I'm a little late with this I fear, but an article in last Friday's FT caught my attention:

Eni, the Italian energy company, and Russia’s Gazprom on Tuesday finally signed a wide-ranging strategy pact to replace a gas distribution deal that collapsed last year.

The deal, which confirms Eni as Gazprom’s single largest customer, comes amid intensified concern about Gazprom’s ability to produce enough gas for domestic and export markets.

A leaked report by ­Russia’s Ministry of Trade and Economic Development predicts the country will not have enough gas from next year to satisfy domestic demand and to cover all its export contracts to Europe. European Union officials say this explains why some European countries have been trying to negotiate bilateral deals directly with Gazprom.

Under the terms of the deal signed on Tuesday, Gazprom will gain direct access to the Italian gas market. It will be able to sell up to 3bn cu m of gas in Italy a year from 2010, equivalent to about 3 per cent of the market and worth about €600m-€750m ($770m-$963m) a year.

The deal helps Eni respond to pressure from its home regulators to reduce its market share in Italy.

In return, Eni will gain access to a number of upstream oil and gas projects with Gazprom. The two companies said they would work together on a series of projects that would be finalised by the end of next year.

Gazprom has long been targeting access to the European retail markets. It already owns 50 per cent of Wingas, a German distribution company, and has tried to strike similar deals with other European countries.

However, EU officials have warned that bilateral deals with Gazprom undermine Brussels’ efforts to work out a common policy towards Russia and its gas supplies. The EU has been pushing Russia to ratify an energy charter treaty that would provide access to Russia’s reserves and remove Gazprom’s monopoly of the export pipeline to Europe.

Now there are so many things on which I am not an expert that it hardly needs saying that I am not an energy sector one. But this type of agreement worries me. Especially when I read things like this:

“The agreement signed today is a major step towards the security of energy supply to our country,” said Paolo Scaroni, Eni chief executive.

I would be very careful about making any assertion that agreements with Russia about long term energy needs constitute a move towards greater security if I were you M. Scaroni. One of the reasons I would be worried is that Russia is far from being a democracy, and is facing an impending demographic melt-down. If you are not aware of the looming issue in the Russian Federation in this regard, then I suggest you dig into some of the posts you will find on this page.

Now at this point no-one really knows how societies as socio-political entities will respond to population meltdown, since we have never been here before, but I think we should all be aware that this is unlikely to be a factor generating more stability. For this reason alone I think it is very important we all try to formulate and abide by a common EU policy. Frankly I fully anticipate 'agro' with Russia over the Baltic states, especially since out-migration by ethnic Latvian, Lithuanian and Estonian populations is leading to a steady increase in the Russian speaking population there, and this is all grist to the mill for aggressive Russian nationalism. An indication of what this might mean can be seen in what is currently happening in Georgia. So I wouldn't want to see Italian pensioners being frozen and held to ransom in midwinter in an attempt to get concessions from the EU over Russian interests in the Baltics.

Does all this seem very far fetched to you, well then try looking at this piece about Serbia, and start thinking about what exactly might happen in those East European societies who seem likely to remain outside the warm hearth of the EU for many years to come:

Serbia - Outbursts of nationalism are nothing new in Serbia, but the blustering graffiti in a Belgrade park belongs to a bygone era. "On your knees before Serbs!" it demands.

In June, Serbia lost access to the sparkling Adriatic coastline when its sister republic, Montenegro, gained statehood. This winter, it could lose the southern province of
Kosovo if U.N.-brokered talks lead to independence as expected.

As their nation relentlessly shrinks, Serbs — a fiercely proud people accustomed to ruling the roost in the Balkans — are slipping into despair.

"How do you like our cemetery?" businessman Zoran Djuric asks cynically, standing on a hill and sweeping his hand over the twinkling lights of the capital below.

A string of staggering setbacks began last spring, when the
European Union suspended pre-membership talks with the former Yugoslav republic for failing to arrest Gen. Ratko Mladic, the world's No. 1 war crimes fugitive long believed to be hiding here.

Of course the key point here is almost missed in the rush, the principal cause of Serbia's population shrinkage is the very low birth rate (data on Serbia itself is hard to come by, but the birth rate fell rapidly in the 1990s and seems to be currently somewhere in 1.5tfr region according to Serbian demographer Mirjana Rasevic - and the out-migration of young Serbians of childbearing age to within the walled garden of the EU were wages are higher and employment prospects greater.

Thursday, November 16, 2006

Spain and Italy

Paola sent me this interesting link from the Charlemagne columnist at the Economist a couple of weeks back and I didn't have the time to comment on it. The comparison between the evolution in the political system in the two countries is an interesting and valid one. Spain has made great strides forward in terms of political maturity in recent years. Unfortunately the same cannot be said about Italy, and this is one of the reasons I am just not optimistic about Italy's capacity for addressing and resolving its substantial economic problems.

BOTH have centre-left coalition governments. Both are committed to European integration. Both are firm supporters of the draft European Union constitution. Both have low fertility, high immigration and declining competitiveness. And both are Latin, Mediterranean and used to taking siestas.

But now Spain and Italy are converging in a new way. For much of the past decade Spain's economy has been growing at around twice the EU average. At this rate, officials beam, Spain will surpass Italy in terms of GDP per head by 2009. If you account for the black economy (Italy does, Spain does not), Spaniards might be richer already. Yes, such claims should be treated with scepticism: in the mid-1980s, Italy boasted loudly and prematurely of overtaking Britain. But Spain's economy is already as big as Canada's (which is, like Italy, a G8 member). And if you add in demographic trends—an immigration boom is more than offsetting a shrinking native population—then the prime minister, José Luis Rodríguez Zapatero, is surely right to assert that Spain will soon join Britain, France, Germany and Italy in the club of Europe's big five countries............

The contrast is especially sharp right at this moment. Both Spain and Italy are in the process of pushing their annual budgets through parliament. But in Spain, says Francisco Fernández Marugán, the Socialist deputy whose job it is to shepherd the budget through the lower house, the coalition partners will add no more than €500m ($625m) to a budget of around €300 billion. In Italy the government agreed a spending plan unanimously at cabinet level. But when it went to parliament, there were 7,000 amendments, of which no fewer than 3,000 came from the ruling coalition. In Italy party and budget discipline alike seem unknown. In Spain they reinforce each other.

Of course, not everything is rosy in the garden of Spain. The fiscal situation is worse than it looks because two-thirds of public debt, attributable to regional governments, is not accounted for. Compared with Italy, Spain has few internationally competitive small firms. It is overly dependent on construction and is “enjoying” a housing boom. As a result, says José Luis Feito, at the employers' federation, the economy is highly vulnerable to higher interest rates, which are likely to be on their way.

Like Italy, Spain is stuck with high-cost, low-productivity businesses that are vulnerable to Chinese competition; poor schools; and low spending on research and development.............

Overall, however, economic success has produced a change in the public temperament of a country comparable only with that of Germany after the second world war, says Pedro Schwartz, a professor at the San Pablo CEU University in Madrid. For most of the 20th century, after defeat in the Spanish-American war of 1898 (known in Spain as “the disaster”), everybody's favourite topic was “the problem of Spain”. Italy was the model of a modernising Mediterranean state. “Spain is different”, as a tourist slogan of the 1960s used to put it.

Now Spain has self-confidence on steroids. Spanish companies are on acquisition sprees, first in Latin America, now in Europe. Two of Europe's top ten business schools are in Spain; Zara, one of the world's fastest-growing retailers, is based in Galicia. Spaniards no longer feel different; they want to be European. They showed it by being the first to vote for, and overwhelmingly approve, the EU constitution.

Of course Paris will undoubtedly want to wax long and lyrical on Spain's housing boom, but I would just point out that this is itself a direct product of the difficulties of managing a 'one size fits all' interest rate policy for the eurozone, and as such can hardly be blamed directly on the Spanish administration itself. Ironically though it is this boom which has produced the huge and unprecedented immigration is Spain (nearly 5 million people in 6 years) and this in and of itself has corrected the population pyramid problem substantially, at least for the time being. Call it the law of unintended consequences if you will. Now everything depends on how well Spain can leverage its comparative advantage vis-a-vis Latin America as the construction boom slows. This may not be easy, but at least it is still all left to play for, and of course Mr Bush has given Spain an enormous LA boost by agreeing to build that wall to 'separate' the US from Latin America.

I might also mention that Claus Vistesen had a relevant post on Spain's construction boom here.

Fiat One More Time

Well I'm sure Paris would never forgive me if I neglected to mention the fact that Fiat had another very good month in October. This is not 'sour grapes' or anything but I do think it is important to take note of the fact that this is partly being driven by substantial discount price offers, and also of the fact that it is the services sector which is the key to the modern developed economy since this now accounts for about 70% of total GDP.

On other fronts I would like to stress that I think the French poor third quarter performance is something of a statistical blip, and that fourth quarter results should be much better in France. This unfortunately cannot be said for Italy or Germany, and I am convinced that in the coming quarters we will see the important underlying weakness in these economies once more revealed.

On some of the theoretical reasons why this should be so, I have this rather provocative post on Demography Matters yesterday which some may find an interesting read.

Toyota Motor Corp., Fiat SpA and PSA Peugeot Citroen last month led the first gain in European car sales since May as they offered discounts to customers and attracted buyers to models released over the past year.

Sales rose 3.6 percent from a year earlier to 1.21 million vehicles, the Brussels-based European Automobile Manufacturers Association said in a statement today. Registrations for the first 10 months of the year advanced 0.4 percent to 13.1 million units.

``The gains show the strongest performers are those with the most recent model range supported by aggressive pricing and marketing efforts,'' said Thomas Ryard, an Amsterdam-based automotive analyst at Global Insight, a consulting company.

Toyota and Fiat discounted cars and found buyers for models such as the Japanese automaker's Yaris subcompact and RAV4 sport- utility vehicles and Turin, Italy-based Fiat's Grande Punto subcompact. Peugeot rose on rebates and on demand for cars such as the small 207 hatchback, which reached dealers in May.

Fiat's European market share through October jumped to 7.5 percent from 6.4 percent a year earlier. Its October sales rose 16 percent to 92,704 cars. In addition to the Grande Punto, the Alfa Romeo 159 sedan, introduced at the end of 2005, contributed to the gains. Fiat will release the Bravo compact model early next year.

Tuesday, November 14, 2006

Third Quarter Growth Slows in Italy

Well since this data falls broadly in line with what I have been saying, we could classify this in the no further comment department. Obviously the really interesting data will come in quarters one and two of 2007.

Italy's economy, Europe's fourth- largest, grew in the third quarter at half the pace of the previous three months, adding to signs that the expansion in the euro region is losing momentum.

Italy's gross domestic product increased 0.3 percent from the second quarter when it expanded a revised 0.6 percent, the European Union's statistics office in Luxembourg, said today. Growth was slower than the 0.5 percent median forecast of 31 economists polled by Bloomberg News.

Italian growth has trailed that of the economy of the dozen countries sharing the euro for at least a decade and continued to lag behind in the third quarter. Growth in the euro zone slowed to 0.5 percent in the period from 0.9 percent, suggesting five interest rate increases by the European Central Bank in the past year is slowing the expansion.....

Today's decline is the latest sign that European growth may be slowing in the fourth quarter. France's economy unexpectedly ground to a halt in the third quarter. Germany, the region's largest economy, grew a slower-than-expected 0.6 percent in the third quarter, about half the pace of the revised 1.1 percent rate of the previous three months, a government report showed today.

Of course all eyes now move over to the ECB to see just exactly what happens next. Claus Vistesen, who has also been covering the eurozone slowdown had a piece earlier in the week on the French data.

Tuesday, November 07, 2006

Italian Retail Sales Stall

Claus Vistesen has already posted on how the pace of expansion of services activity in the Eurozone has been slowing for some four months now. The zones various economies generally seem to be over the peak in this cycle, lead by Germany, from where we learn today that industrial output actually declined in October. (It is worth pointing out at this stage that services activity is what we should be following most closely, since this accounts for some 70% of total economic activity).

More evidence that one swallow doesn't make a summer is to be found in today's retail sales data from Italy, since we learn that:

Italian retail sales fell the most in six-months in October as the prospect of government spending cuts and higher income taxes prompted households to shop less.
An index of retail sales stood at a seasonally adjusted 47.4 compared with 51.2 in September, according to a survey of 440 retailing executives compiled for Bloomberg LP by NTC Economics Ltd. A reading below 50 signals a contraction

Now regular readers may remember that back in September, and hard on the heels of that important victory in the World Cup, Italian consumers were feeling very good indeed, and in particular buying a lot of cars from Fiat. I was also fairly sceptical that this optimism could be maintained in the face of a fairly complex economic and political reality. I think the way economic events are moving is more or less justifying my earlier reservations: 2006 has been a very good year in Italian terms, but here our best shot 'just isn't good enough', at least not yet it isn't:

While the dozen nations sharing the euro are benefiting from the fastest economic growth since 2000, Italy is struggling to keep up and has lagged the average growth rate of the euro bloc since at least 1992, according to Bloomberg data.

And don't miss this bit. Profitability is falling as margins are squeezed. This is a point I have been attempting to highlight in both the Fiat and the recent tourism data cases:

Italian retailers' profits were also squeezed by lower- than-expected sales, according to the report. A measure of gross profit margins had its biggest drop in seven months, falling to 40.6. That's down from September's 43.0. Thirty-eight percent of retailers said sales were worse than they had forecast for October.

Prodi's FT Interview

Romano Prodi has an interview in the FT today, here are some of the points that struck me:

"Italy must raise its economic growth rate to at least the European Union average or it will be “lost”,"

This is a fairly dramtic statement, which at the end of the day doesn't mean too much. It is headline catching, that is all. It is of course true, and more true than I think Romano Prodi really appreciates.

"We have been 24th out of the 25 countries in the last five years

Well, again this is true, but it seems to be more a politically convenient statement, since the other side were in office during those years. In fact the low growth phenomenon in Italy goes back to the early 90s, and thus both sides of the political divide could be thought to share responsibility if the garden has been 'untended'.

Perhaps one of the most debatable points is this:

The real situation of Italian industry is not as bad as many think. We have a surplus in our balance of trade, if you take out energy imports"

I really don't see the logic behind this sentence. Italy needs, or doesn't need, energy? Is Italy planning to become energy self-sufficient in the foreseeable future? If not, energy is an import just like any other kind of raw material, and the reality would seem to be that Prodi is indirectly admitting that Italy is running a trade DEFICIT.

Now the reasoning behind Prodi's 'spin' could be that he anticipates energy prices could drop at some stage. Is this a realistic expectation? Well energy and commodity prices have fallen back somewhat in recent months, but this is a result, more than anything, of anticipated declining demand, as global growth slows, rather than increased supply. So once we get through the next recession and global growth hits newer and higher records (as the developing countries develop) energy prices could well be expected to rise once more. So Prodi is offering false hope here I think, and whats more, since the lower prices of the moment are due to slower growth this will also hit his number one Italian objective of more growth.

On a more general level Italy desperately needs a substantial trade surplus if it is to generate growth, since, as I have been systematically arguing on this blog, societies with a median age of 44 find it very hard to generate substantial growth in domestic demand, so strong exports are very much a necessity rather than a luxury.

Talking of which:

"In the footwear industry, a traditional Italian strength, “the number of shoes sold has halved in 10 years but revenues have increased. Even in this very simple industry there has been a concrete restructuring and we have placed ourselves in the luxury bracket”.

Just how sustainable is this move up the value chain in traditional product manufacture? (Design would be another thing). This strategy has been employed by textile manufacturers here in Spain, and there are now an increasing number of complaints from those manufacturers about rising Chinese competition in this area too. This is hardly surprising, since China is itself struggling to move up the value chain, and while the Chinese may have started out with low end, low quality, products, they will undoubtedly not stop at this point any more than the Europeans or the Japanese did. It could well be a good idea to start bearing that in mind now.

Monday, October 30, 2006

Pension Reform and the Prodi Coalition

Well despite the fact that Wolfgang Munchau seems to feel that the Prodi coalition is shaky, but not about to collapse, I continue to have my worries, and here's why:

A dispute about pensions reform erupted in Italy’s government at the weekend immediately after Romano Prodi, prime minister, extracted pledges of loyalty to his leadership from the squabbling parties in his centre-left coalition.

Mr Prodi said all nine parties in his government had agreed to start discussions next January on overhauling Italy’s state pensions system, but two communist parties that hold the balance of power in parliament contradicted him.

The problem is that Prodi is very much between a rock and a hard place. The deficit cannot be brought back under control without substantial health and pension reforms, and some of the members of his coalition are unlikely to ever vote for real and meaningful reforms since they are in denial that these are necessary. So we seem rather destined to wobble forward until we eventually fall over, caught as he is between the ratings agencies on the one side and his ex-communist allies on the other. Trying to stay in the middle here just will not work. Really, to make any sort of economic prognosis about Italy you need to factor-in this problem.

On other matters Prodi is apparently forecasting economic growth of 3%, this is a very attractive idea, but if you look at Italys growth trajectory over the last 5 decades, this is now, quite simply, to live in cloud cuckoo land. I have, it seems, to agree with his political opponent:

(Prodi)..said his government had set its sights on boosting Italy’s annual gross domestic product growth rate to 3 per cent, far in excess of the 1.3 per cent that, according to the Paris-based Organisation for Economic Co-operation and Development, is Italy’s present rate.

“Prodi has had a mid-autumn night’s dream, talking about staying in power for five years and increasing GDP growth to 3 per cent a year,” said Fabrizio Cicchitto, an opposition legislator, said on Sunday.

Also, and in conclusion, don't miss this, it gives an indication of the scale of the problem:

Pensions expenditure accounts for 14.7 per cent of Italy’s GDP, the highest in the 15 countries that made up the European Union before its expansion to 25 member-states in 2004.

The burden constrains Italy’s ability to reduce its public debt, forecast this year to be 107.6 per cent of GDP, and cramps much-needed investment in education and infrastructure.

Under a law passed by the government of Silvio Berlusconi, the former centre-right premier, the retirement age for many Italians will rise to 60 from 57 in January 2008.


There is a reasonably intelligent analysis of all this by Tony Barber in the FT. Obviously, and in particular, I notice this:

Unlike some non-Italians, practically no Italian expert questions the country’s ability to remain in Europe’s monetary union. Nonetheless, few hide their worries about the chronic lack of economic reform and the political paralysis that partly accounts for it.

“The divergence between the growth in labour cost per unit produced in Italy and in the rest of the euro area is not sustainable,” Lorenzo Bini Smaghi, Italy’s member of the European Central Bank’s executive board, said in August. “In the next 10 years, it is absolutely necessary that salaries rise in line with productivity growth, if not at a slower rate.”

Obviously Lorenzo Bini Smaghi does not share Eric Chaney's optimistic reading of the situation (I will have more to say on all this in another moment). Also there is this:

“We have a country that is too slow in taking decisions and has too many competing power centres,” Luca Cordero di Montezemolo, head of Confindustria, Italy’s employers’ association, told the Financial Times this month. “A parliamentary system with 23 parties cannot function efficiently. Without a strong bipartisan reform of the state, including electoral reform, our country is destined not to grow. Ten years from now, we will be paying for the non-choices of today.”

Absolutely to the point I think. As is his observation on the plight of the DS and Margherita:

For the parties that have most to lose from Mr Prodi’s dwindling credibility as a reformer are the Democrats of the Left (DS) and the Margherita, the two largest in his coalition........the electoral success of the DS and Margherita depends on their ability to persuade voters that they can be intelligent managers of Italy’s capitalist system and will not “punish the middle classes”.

To the dismay of DS and Margherita strategists, opinion polls suggest large numbers of Italians think Mr Prodi’s budget falls short on both counts. Not surprisingly, Piero Fassino and Francesco Rutelli, the parties’ leaders, are insisting to Mr Prodi that the government waste no more time in launching economic reforms.

They call it the government’s “phase two” – and they may not have been happy to hear Mr Prodi describe this phrase last Wednesday as “a term I don’t know and don’t use”.

Centre-left politicians dismiss as “nonsense” the rumours in Rome that a plot is afoot to oust Mr Prodi. Yet no one has forgotten how Mr Prodi’s 1996-98 premiership ended: he was overthrown in a parliamentary revolt led by communists but exploited by other politicians to replace him with Massimo D’Alema, now foreign minister.

Publicly, almost everyone on the centre-left says that, if Mr Prodi’s government were to fall, perhaps because of a lost confidence vote in the Senate, Italy would hold a snap general election. But matters may not be so simple.

Silvio Berlusconi, the opposition leader, wants an election because, at the age of 70, it is his best hope of holding the premiership one more time. But not all his centre-right colleagues are thrilled at this prospect. For example, Pier Ferdinando Casini, a Christian Democrat often tipped as a future premier, says he sees no need to hold an election. Rather, a new government based on Italy’s moderate parties of left and right could take over.

This kind of realignment would halt Italy’s never entirely convincing progression since the early 1990s towards a system that clearly distinguishes left from right.

Some respected figures such as Mario Monti, the former European commissioner, favour it because it would deny power to extremists in both coalitions – communists on the left, the rabble-rousing Northern League and some elements in the National Alliance on the right. It might even boost the prospects for economic reform.

However, it would undoubtedly revive memories of the years from 1948 to 1994, when the former Christian Democratic party dominated a political system increasingly discredited by corruption, economic incompetence, political violence and organised crime.

Whether Italy is ready for such a political upheaval remains to be seen, but the present system – reinforced by the re-introduction last December of full proportional representation in general elections – appears to have an inbuilt tendency to block reform.

Given his hair’s-breadth election victory, Mr Prodi’s window of opportunity was always going to be narrow. But the pressure on him is intense because, in five years of power, Mr Berlusconi introduced few notable reforms. In spite of holding a parliamentary majority stronger than any government had enjoyed since the collapse of fascism, the former prime minister achieved little except some modest changes to the pension system and labour market.

Italy’s budget deficit climbed above 4 per cent of GDP under Mr Berlusconi. It is forecast this year to reach 107.6 per cent of GDP (the European Union’s treaties stipulate that countries joining the eurozone should have debts of 60 per cent of GDP or less). Excluding debt interest payments, Italy’s budget balance needs to be about 2 per cent of GDP in surplus to prevent the debt stock from increasing. In the last years of the Berlusconi government, this surplus shrank so much that the public debt rose for the first time in a decade.

With deficit and debt reduction a priority, Mr Prodi’s government published a four-year outlook in July that promised deep and permanent spending cuts in public sector employment, healthcare, welfare and local government. Equally welcome were measures to open some of Italy’s notoriously protected professions and product markets to competition. Lawyers, notaries, pharmacists, taxi drivers and others with privileges more suited to the Middle Ages than a modern economy would no longer be able to keep prices high and exclude outsiders.

Since August, the flame of reformist zeal has burned less brightly. Although the 2007 budget aims to cut Italy’s deficit to below 3 per cent, it does so mainly by raising taxes and cracking down on tax evasion, rather than making the spending cuts promised in July. On October 19 Standard & Poor’s and Fitch Ratings, the credit ratings agencies, criticised the budget and downgraded Italy’s government debt.

Mr Montezemolo says: “We have to get out of the vicious circle of ‘more taxes, more spending and therefore still more taxes’. We can do it. It may not be popular, but we need cuts, cuts and more cuts.”

This month, internal government disputes have caused the budget to undergo continual revision, a process that Tommaso Padoa-Schioppa, finance minister, defends as entirely normal.

He told the magazine L’Espresso: “Once it was said that the novel is by definition an imperfect literary genre, that it can’t be like a sonnet in which everything is perfect. So it is with the budget. In a novel a woman walks into the room wearing red. Then when she leaves she is described as wearing blue, because the author has forgotten she was in red. Such inconsistencies can also be found in the budget. The parliamentary process is needed to correct them.”

Come December, Italians will know if their government has successfully edited its “imperfect novel”. Meanwhile, the “perfect sonnet” of economic reform is a verse form no Italian government seems capable of mastering.

Business Confidence Indexes

Despite the fact that some would have it that I am given to presenting critical data, whilst ignoring the more positive variants, the real reason I didn't get round to posting on the most recent confidence indexes is that I have been labouring under the effects of a heavy cold. Sometimes the simplest explanation for events is the most accurate one, and we are, as Nietzsche was want to say, 'human, all too human'.

As far as business confidence indexes goes last week largely brought good news, with the readings rising in France and Germany, as well as in Italy.

Business confidence in Germany and France unexpectedly rose in October as lower oil prices and exports to Asia brightened the outlook for economic growth in Europe. Stocks rose to the highest in five years and bonds fell.

The Ifo institute in Munich said today its index climbed to 105.3 from 104.9 in September. Economists expected a decline to 104.5, the median of 39 forecasts in a Bloomberg News survey showed. In France, a gauge of optimism advanced to 108 from 106 in September. Germany and France together account for more than half the euro region's economy.

Italian business confidence remained near a four-month high in October as declining oil prices reduced manufacturing costs and orders increased. The Isae Institute's confidence index fell to 97.1 from 97.3 in September, the state-funded research center said today in Rome.

As we have been seeing, China forms a big part of the story here:

Foreign demand and cheaper oil prices are easing those worries for now. European exports to China jumped 21 percent in the first seven months of this year compared with the same period a year ago, the European Union's statistics office said last week. Confidence among exporters in Germany and France rose in October, today's reports showed.

``Trade between Asia and Europe has grown stronger this year, and that trend will continue,'' said Klaus Herms, chief executive officer of Germany's Kuehne & Nagel International AG, which books space on ships and planes for exporters.

The real question is where we go from here. There is some discussion in the press about the relative weighting of the "current conditions" and the "expectations" components in these indexes, with the suggestion being that the high values being registered are more a reflection of the former. The FT had a good summary last weekof the relative readings on (and variance between) the German Ifo and ZEW surveys.

My feeling is that the outlook moving forward is much more complicated than this months readings suggest. Of course others may chose to differ, and we will soon see who is right.

Italy's business confidence ``probably has pretty much peaked,'' said Perkins at ABN Amro, who says investors have expected French, German and Italian businesses optimism indexes to drop for the past six or seven months.

An index measuring production expectations for the next three months fell to 21, from 22 in September, Isae said. A measure of price expectations for the next quarter rose to 19, the highest in at least three years, from 17 in September.

Confidence in Italy in the coming months may be hurt by the government's efforts to tame the budget deficit next year, which includes 34 billion euros of spending cuts and revenue measures, including tax increases.

Prime Minister Romani Prodi's budget proposal, which needs to pass in parliament by the end of the year, was not enough to stave off downgrades by both Standard & Poor's and Fitch Rating last week. Both S&P and Fitch said the budget didn't do enough to cut spending and relied too much on higher tax revenue to lower the deficit and debt.

Italian consumer confidence fell in October from a four- year high, partly on concern that higher taxes included in the government's budget plan would leave households with less money to spend.


Thanks to Paris for providing a link to the latest industrial data from ISTAT, which is up in October 3.4% y-o-y (I'll put an English language link as and when I find one). This is completely consistent with the current conditions component of the above-mentioned indexes. So there is no doubting the currently favourable environment, the question is where exactly we are in the cycle. My feeling is that we are now at, or near, the top of this cycle. In any event we are soon about to find out.