September Retail Sales

Retail sales were up in September, and this, as Paola would point out to me, is thoroughly consistent with the September confidence index reading:

Italian retail sales rose for the first time in eight months in September on promotions and increased consumer spending, a Bloomberg purchasing managers index shows.

An index of retail sales rose to a seasonally adjusted 51.2 from 48.7 in August, according to a survey of 390 retailing executives compiled for Bloomberg LP by NTC Economics Ltd. today. It's the first time since January that there's been a reading above 50, which signals an increase.

``Italy's economy is growing at its fastest pace in five years, and consumer spending is the engine,'' said Francesca Panelli, an economist at Aletti Gestielle Sgr in Milan. ``It's clear that going forward that growth is going to slow.''

So September was a good month. This is fine, but it is worth digging a little bit under the surface to try and see what is actually happening.

In the first place we should note that this is the first time in 8 months that this has happened, and during this time the European economy has been having something of a growth renaissance, so that in itself is rather troubling.

Secondly part of the reason for the September flurry has apparently been a reduced price stock-clearing operation, and this 'mini boom' may therefore not find too much of an echo when it comes to profitability:

The increase in sales ``was generally linked to increased marketing and promotional work,'' NTC said in the report. ``There was also some mention of higher customer attendance.' taly's summer sales season wrapped up in September, with retailers slashing prices and clearing out old inventory. As a result, profit margins continued to decrease, according to 23 percent of those surveyed. Profit margins tightened the least since May as promotions boosted sales, the report said.

And looking to the future interest rates are rising, and fiscal tightening is just round the corner:

The European Central Bank raise interest rates by a quarter of a percentage point today, a move that may also slow spending toward the end of the year.

``Higher rates definitely will increase spending on mortgages and loans and will reduce consumer spending,'' Panelli said.

So bearing all these factors in mind I think there is still every reason to ask whether all in the garden is as rosy as it seemed in September, after all you can't keep winning the world cup every couple of months.

Macroeconomic Implications of Demographic Developments in the Euro Area

The ECB has an interesting and useful Occasional Paper on the above topic (which can serve as a good point of departure for those who are unfamiliar with the issues raised).

The paper contains a useful summary of the 'best guess' arguments about potential demographic trends. As they indicate the three parameters involved - fertility, longevity and migration - are all subject to variance and volatility, so any longer term projections must have a fair degree of uncertainty attached. However it is clear that Europe is getting older, and has (and will continue to have) below replacement fertility. These features will undoubtedly condition the macro economic climate for many years to come.

Abstract

This paper examines the macroeconomic consequences of future demographic trends for economic growth, financial markets and public finances. It shows that in the absence of reforms and responses by economic agents, the currently projected demographic trends imply a decline in average real GDP growth and a severe burden in terms of pay-as-you-go pension and health care systems. Population ageing will change the financial landscape, with a potentially larger role for financial intermediaries and asset prices. All this points to a need to closely monitor demographic change also from a monetary policy perspective. While population projections are surrounded by considerable uncertainty and the effects of demographic change tend to be drawn out, the magnitude of the potential effects calls for an early recognition of this issue. This paper provides some input to the examination of possible policy issues.

More On The 2007 Budget

Following-up on what I was saying at the weekend about the details of the 2007 Italian budget proposals, Padoa-Schioppa is adamant that the proposals conform with the requirements of the Stability and Growth Pact. Prodi is too:

"We'll meet the European parameters in 2007, not 2008, and we're committed to putting public accounts in line also in the future"

Not everyone, however, is completely convinced:

``The markets will have to analyze the budget carefully,'' said Salvatore Zecchini, professor of economic policy at Tor Vergata University in Rome. ``The spending cuts are one big question mark, and we'll have to see if the fight against tax evasion will generate the forecasted income.''

``Prodi wasn't strong enough to get the budget he wanted,'' said Gianfranco Pasquino, a professor of political science at Johns Hopkins University's School of Advanced International Studies in Bologna, Italy.

``The message of this budget is that the Italian government has been unable to force or convince unions that pension reform is necessary.''

Prodi's effort to raise the retirement age in Italy was excluded from the budget last week, when he gave into demands from union leaders and its communist allies. Three billion euros in pension spending reductions are included in the budget.


In addition the budget itself is not lacking in opponents, whether from the right or from the left, and the government's wafer thin majority in the senate raises the issue of whether or not it will be watered down before finally being adopted. Certainly something to watch.

Prodi's Cabinet Agrees Budget

The terms of Italy's 2007 draft budget were agreed by Romano Prodi's cabinet yesterday:

"The budget includes 20 billion euros ($25 billion) in spending cuts and 13.4 billion euros in revenue-raising measures, including tax increases, to bring the deficit within the European Union's limit of 3 percent of gross domestic product for the first time in five years."

The details aren't all yet clear, but obviously the package is a mixture of spending reductions and revenue raising.

The EU is watching to see if Italy sticks to its pledge to bring the deficit down to 2.8 percent of GDP next year from as much as 4.8 percent this year. The budget includes deficit- cutting measures worth about 15 billion euros, Finance Minister Tommaso Padoa-Schioppa said.

Part of the debate is about the proposed changes in personal taxation:

The changes to income-tax rates reverse cuts made by Berlusconi in 2004 that particularly benefited middle-income earners. Prodi plans to increase income taxes for those who earn more than 55,000 euros per year, while reducing them for those who make less than 40,000 euros per year. Details of the new rates will be announced before Oct. 2, Deputy Prime Minister Enrico Letta said.

and part is about the level of cuts in education, pensions and health care. The hard part for Prodi will be to hold his coalition together:

The state will cut spending on health care by 3 billion euros, on funding to local service agencies, which now will be free to levy their own taxes, by 4.6 billion euros, and on pensions by 9.5 billion euros, Padoa-Schioppa said.


However:

About 5 billion euros counted as a pension reduction is actually the transfer of severance pay to the state pension agency INPS, a move that could be rejected by the EU's accounting watchdog Eurostat, Padoa-Schioppa said.

Of course apart from passing the scrutiny of the EU Commission all this now has to go to the Chamber of Deputies and even more importantly to the Senate.