Italy exits recession but sadly continues its economic depression

by Shaun Richards

Today brings Italy into focus as we find out how it did in the first three months of this year. The mood music has been okay ( 0.3% GDP growth in France) and really rather good ( 0.7% GDP growth in Spain) but we are of course looking at the country described in economic terms as a girlfriend in a coma. The situation has recently deteriorated yet again as highlighted below.

As you can see there has been quite a plunge which illustrates part of the girlfriend in a coma issue. This is that in any economic slow down Italy participates but in a period of growth it grows much less than its peers. So it has for the whole of this century been “slip-sliding away” as Paul Simon would say. Putting that into numbers in the better periods it struggles to grow at more than 1% per annum on average. An example of that has been provided by the last six years as if we look at the period from the beginning of 2013 to the end of 2018 we see that GDP growth was less than 5%. This means that the 402.8 billion Euros of quarterly economic output at the end of 2018 was still a long way short of a number that according to the chart nudged over 425 billion early in 2008. Putting it another way it has joined in with the drops including the Euro area crisis of 2010-12 but not shown anything like the same enthusiasm for the rallies.

Fiscal Problems

This was something of a headliner last autumn as the Italian government pressed the Euro area authorities for some more laxity on the annual deficit before mostly being forced back. But this is not really the problem as Italy has not been an over spender and let me highlight with the data.

The government deficit to GDP ratio decreased from 2.5% in 2016 to 2.4% in 2017. In 2018, the Government deficit to Gross Domestic Product ratio was 2.1%

The primary surplus as a percentage of GDP was 1.4% in 2017, unchanged with respect to 2016.

In 2015 the deficit was 2.6% so we can see that Italy had behaved according to Euro area rules by being below 3% on an annual basis and furthermore had been trimming it.

The catch is that with the low level of economic growth even that has led to this as Eurostat lists those who fail the Maastricht criteria.

Greece (181.1%), Italy (132.2%), Portugal (121.5%), Cyprus (102.5%), Belgium (102.0%), France (98.4%) and Spain (97.1%)

The total has risen from 2.173 trillion Euros at the end of 2015 to 2.32 trillion Euros at the end of last year. As it happens that is nearly exactly the same size as France and the catch is that the French national debt has been rising faster which creates its own worries. But the Italian problem is the way that its debt relates to the lack of economic growth which means that relatively it poses a bigger question.

The dog that has not barked has been the issue of debt costs which would have made all of this much worse if we lived in a bond vigilantes world. But instead the advent of Euro area QE from the ECB means that debt costs have fallen for Italy. In 2015 they cost 68.1 billion Euros or 4.1% of GDP as opposed to 65 billion Euros or 3.7% of GDP last year. Extraordinary really! How? Here you go.

Italian version. Excluding QE, Italy‘s public debt ratio is 110% of GDP. ( @fwred )

Also via cheaper borrowing costs which have risen over the past year  but were believe it or not negative at the short-end for a while. Back in the Euro area crisis I recall the benchmark ten-year yield reaching 7% which puts the current 2.63% into perspective.

I note that this issue reappears from time to time. From Lorenzo Codogno earlier.

My op-ed written with ⁦⁩ on “Italy’ debtrestructuring would do enormous damage” published today in Italy’s business daily Il Sole 24 Ore.

In some ways Euro area membership might help. What I mean by that is if the Bank of Italy wrote off its holdings of Italian bonds then the Euro as a currency might not be affected all that much as it reflects the overall area and especially a fiscally conservative Germany.

On the other side of the coin there is something which is a hardy perennial.

Euro area banks sold domestic government bonds in March (-€13bn net). The total over the past 12-month is still positive (+€23bn) but that’s all due to Italy where banks have started to increase their sovereign exposure again over the past year or so. ( @fwred )

Perhaps they are hoping there will be another ECB inspired party along the lines of this described in Il Sole 24 Ore. The emphasis is mine.

Although these loans are tied to loans to the real economy, it is expected that there will be some flexibility in its implementation in such a way as to allow banks to use the funds to buy government bonds, earning money on the rate differential (“carry trade” in jargon) ). Only when the ECB publishes the details of the transaction in June will we know how generous the new Tltro will be.

Perhaps it will be a leaving gift from Mario Draghi to the banks he used to supervise meaning Grazie Mario may be a new theme. It makes me wonder if profits from what has been called “gentlemen of the spread” maybe the only profits Italian banks these days? Also let me apologise to female traders on behalf of the author of that phrase.

Labour Market

This has brought some welcome news today.

In March 2019, the number of employed people increased compared with February (+0.3%, +60 thousand); the employment rate rose to 58.9% (+0.2 percentage points)…..The number of unemployed persons fell by 3.5% (-96 thousand); the decline involved men and women and all age classes. The unemployment rate dropped to 10.2% (-0.4 percentage points), the youth rate decreased to 30.2% (-1.6 percentage points).

As a headline the rising employment rate and falling unemployment and especially youth unemployment rates are welcome. But sadly we only have to look back to February and recall the unemployment rate was published at 10.7% to see a sadly familiar issue. It is unreliable as January was revised down by 0.5% as was March last year but February last year was revised up by 0.9%.

There is also this highlighted a year ago by a paper for the Swiss National Bank.

An exception is Italy where productivity growth started to stagnate 25 years ago

Okay why?

We find that resource misallocation has played a sizeable role in slowing down Italian productivity growth. If misallocation had remained at its 1995 level, in 2013 Italy’s aggregate productivity would have been 18% higher than its actual level. Misallocation has mainly risen within
sectors than between them, increasing more in sectors where the world technological frontier has
expanded faster.


There was both good and nor so good news in the mid-morning release.

In the first quarter of 2019 it is estimated that the gross domestic product (GDP), expressed in chained values ​​with reference year 2010, adjusted for calendar effects and seasonally adjusted, increased by 0.2% compared to the previous quarter and by 0, 1% in tendential terms.

The good news is that Italy has recovered the ground lost in the second half of last year but the kicker is that it has grown by only 0.1% in a year, which is well within the margin of error. Or if you prefer it has escaped recession but remains stuck in a depression.

Another perspective is provided by the fact that this is the first time quarterly economic growth has risen since the end of 2016. As to the productivity problem I think that it is linked to the weakness of the banking sector which needs to look beyond punting Italian bonds as a modus operandi if Italy is to improve and escape its ongoing depression.

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