Italy downgrades its economic growth forecasts yet again

by Shaun Richards

Yesterday brought something familiar and something much less familiar in Italy. So ket us start with the latter.

ROME (Reuters) – Italy has hiked its target for this year’s budget deficit to 11.8% of gross domestic product from an 8.8% projection made in January, a government source told Reuters.

The new target is contained in the Treasury’s annual Economic and Financial Document (DEF) which Mario Draghi’s cabinet approved at a meeting on Thursday.

The new target for the fiscal gap incorporates the impact of a 40-billion-euro stimulus package which the cabinet signed off on at Thursday’s meeting, the source said. Italy has not posted a double-digit deficit since the early 1990s.

The issue with Italy has not been the size of its fiscal deficits in relative terms as it has maintained better control over them than its peers. The problem as we have noted in our “Girlfriend in a Coma” theme is that her lack of economic growth has meant that even with relative fiscal control Italy has seen a rising national debt which is the familiar part of the leaks yesterday.

The public debt, meanwhile, will rise to 159.8% of GDP, to fall to 156.3% in 2022, 155% in 2023 and 152.7% in 2024, premier’s office sources said after the cabinet meeting that OK’d the DEF. ( Ansa)

The plans are always like the one above in that a small annual decline is forecast. The reality is that the numbers keep singing along with Jackie Wilson.

You know your love (your love keeps lifting me)
Keep on lifting (love keeps lifting me)
Higher (lifting me)
Higher and higher (higher)

For example back in the days of the Greek crisis a level of 120% of GDP was set as a threshold partly to avoid embarrassing Italy ( and Portugal as it happens). Italy did not crash through such levels in the way that Greece did but as you can see fears of 120% have been replaced by 160%. In terms of outright amounts the Bank of Italy told us this yesterday.

In February 2021, the general government debt was equal to € 2,643.8 billion, up by € 36.9 billion compared to the previous month

This whole process means that Italy has the biggest debt in Europe whilst being the 4th largest economy and the 3rd largest in the Euro area. There is always plenty going on.

In February, general government recorded net bond issues for € 34.1 billion, banks net redemptions for € 2.4 billion The remaining sectors made net issues for € 3.2 billion

Economic Growth

There is something else which is familiar about the update and it is the saddest part of all.

ANSA) – ROME, APR 15 – Italy’s GDP will rise by a projected 4.5% this year, according to the DEF economic and financial blueprint approved by the government, premier’s office sources said Thursday.
This will be followed by 4.8% growth in 2022, 2.6% in 2023 and 1.8% in 2024, the DEF says, “unprecedented levels of growth in the last decade”.

The growth forecast for this year was previously 6% and the economic history of Italy is of reality being much weaker than forecast. Indeed Italy has struggled to maintain any sort of economic growth rate above 1% for any period of time. So “in the last decade” could be replaced with “this century” or during its membership of the Euro.

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The downgrade above follows on from this from the 6th of April when a fall in the unemployment rate was reported but in fact due to a revision this was the reality.

So we see that they have raised the reported unemployment rate by 1% or so and the youth unemployment rate by around 2%.

A rather toxic combination.

Looking Ahead

The official monthly report gives us some more detail on the state of play.

In the fourth quarter of 2020, the Gross Domestic Product (GDP) and value added decreased by 1.9% with respect
to the previous quarter.
Industrial production in February increased marginally (0,2% with respect to January) and the index of retail trade
augmented by 7.2% in volume terms in the month on month series. In the three months to February 2021, despite
the monthly growth, volume of sales fell by 2.6% when compared with the previous three months.

They omit to point out that the annual position for retail sales is as shown below.

Year on year, value of retail trade continued to decrease, dropping by 5.7%. Volume sales contracted by
7.0%.

If we do the same for production we see this.

The calendar adjusted industrial production index decreased by 0.6% compared with February 2020
(calendar working days in February 2021 being the same as in February 2020).
The unadjusted industrial production index decreased by 1.3% compared with February 2020.

There are of course lockdown issues here but as 2021 has progressed Italy has made little progress. This has not been helped by its unusual approach to the vaccine programme where it has chosen to vaccinate many younger people leaving the most vulnerable still waiting.

The hope is in the savings numbers below for when things open up again and the savings get spent.

In 2020, gross disposable income of consumer households decreased by 2.8% with respect to the previous year,
while their final consumption expenditure decreased by 10.9%. The saving rate of consumer households was 15.8%,
7.6 percentage points higher than in the previous year.

Trade

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A more optimistic picture or if you prefer the good part of Italy is this.

The trade balance in February 2021 amounted to +4,754 million Euros (+605 million Euros for EU countries and +4,149 million Euros for non EU countries).

The numbers have been affected by the pandemic but the overall message remains that Italy is a strong exporter. If we break the numbers down it has net exports of comsumer and capital goods of around 6.6 billion from which energy imports of around 2.2 billion subtract.But somehow those numbers which look like ones from a competitive economy never seem to translate into economic growth.

The Euro

We can look at this in two ways. The first from the trade figures is that Italy looks rather competitive at the levels of the Euro we have seen ( currently just under 1.20 versus the US Dollar). But when we switch to overall economic growth it looks very uncompetitive!

Comment

The issue here is that Italy does have a competitive economic heart mostly in Northern Italy but the blood never seems to reach the rest of the core let alone the more nether regions. The challenge for Prime Minister Draghi is to change that. If you are a New York Times reader that will seem a mere bagatelle.

The new prime minister is leveraging his European relationships and his solid reputation to make Italy a force on the continent in a way it has not been in decades…….On Feb. 25, he joined a European Council videoconference with Ms. von der Leyen and other European Union leaders. The heads of state warmly welcomed him. “We owe you so much,” Bulgaria’s prime minister told him.

But dealing with reality in Italy is much harder and that includes a banking sector which has seen collapse after collapse under what to give you a clue are called the “Draghi Laws”. It is also not clear to me that threatening to stop vaccine exports as is lauded in the piece will do the pharmaceutical industry in the Euro area any good as time passes. Also perhaps one day we might be updated on how a man who led an organisation which drove austerity has made the paradigm shift to pushing for a fiscal stimulus?

But Mario has passed one advantage to himself because all the ECB QE that he began means that Italy can borrow very cheaply and sometimes even at negative yields. Its ten-year yield at 0.75% is pretty much the same as the UK’s and debt costs are low. So he can borrow and fire up some short-term economic growth. But further out problems lie in wait as Italy struggled to grow with a population boosted by migration whereas now it is shrinking.

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