Italy may be in a recession but more importantly its depression never ended

by Shaun Richards

The last 24 hours have brought the economic problems and travails of Italy into a little sharper focus. More news has arrived this morning but before we get there I would like to take you back to early last October when the Italian government produced this.

Politics economy, reform action, good management of the PA and dialogue with businesses and citizens will therefore be directed towards achieving GDP growth of
at least 1.5 percent in 2019 and 1.6 percent in 2020, as indicated in new programmatic framework. On a longer horizon, Italy will have to grow faster than the rest of Europe, in order to recover the ground lost in the last
twenty years.

This was part of the presentation over the planned fiscal deficit increase and on the 26th of October I pointed out this.

If we look back we see that GDP growth has been on a quarterly basis 0.3% and then 0.2% so far this year and the Monthly Economic Report tells us this.

The leading indicator is going down slightly suggesting a moderate pace for the next months.

They mean moderate for Italy.So we could easily see 0% growth or even a contraction looking ahead as opposed some of the latest rhetoric suggesting 3%  per year is possible. Perhaps they meant in the next decade as you see that would be an improvement.

Political rhetoric suggesting 3% economic growth is a regular feature of fiscal debates because growth at that rate fixes most fiscal ills. The catch is that in line with the “Girlfriend in a Coma” theme Italy has struggled to maintain a growth rate above 1% for decades now. Also as we look back I recall pointing out that we have seen quarterly economic growth of 0.5% twice, 0.4% twice, then 0.3% twice in a clear trend. So we on here were doubtful to say the least about the fiscal forecasts and were already fearing a contraction.

Yesterday

All Italy’s troubles were not so far away as the statistics office produced this.

In the fourth quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) decreased by 0.2 per cent with respect to the previous quarter and increased by
0.1 per cent over the same quarter of previous year.

Whilst much of the news concentrates on Italy now being in a recession the real truth is the way that growth of a mere 0.1% over the past year reminds us that it has never broken out of an ongoing depression. If we look at the chart provided we see that in 2008 GDP was a bit over 102 at 2010 prices but now it has fallen below 97. So a decade has passed in fact more like eleven years and the economy has shrunk. Also I see the Financial Times has caught onto a point I have been making for a while.

Brunello Rosa, chief executive of the consultancy Rosa and Roubini, has pointed out that, on a per capita basis, Italy’s real gross domestic product is lower than when the country adopted the euro in 1999. Over the same period Germany’s per capita real GDP has increased by more than 25 per cent, while even recession-ravaged Greece has performed better than Italy on the same basis.

On that basis Italy has been in a depression this century if not before. Indeed if you look at the detail it comes with something that challenges modern economic orthodoxy, so let me explain. In 1999 the Italian population was 56,909,000 whereas now it is just under 60.5 million. Much of the difference has been from net migration which we are so often told brings with it a list of benefits such as a more dynamic economic structure and higher economic growth. Except of course, sadly nothing like that has happened in Italy. As output has struggled it has been divided amongst a larger population and thus per head things have got worse.

Meanwhile this seems unlikely to help much.

Italy’s statistical institute  will soon have a new president, the demographer Gian Carlo Blangiardo. He has recommended calculating life expectancy from conception – rather than birth – so as to include unborn babies. ()

Also population statistics in general have taken something of a knock this week.

Pretty interesting – New Zealand just found it has 45,000 fewer people than it thought. In a population of 4.9 million (maybe), that means economists might have to start revising things like productivity and GDP growth per capita. ( Tracy Alloway of Bloomberg).

Can I just say chapeau to whoever described it as Not So Crowded House.

The banks

I regularly point out the struggles of the Italian banks and say that this is a factor as they cannot be supporting the economy via business lending so thank you to the author of the Tweet below who has illustrated this.

As you can see whilst various Italian government’s have stuck their heads in the sand over the problems with so many of the Italian banks there has been a real cost in terms of supporting business and industry. This has become a vicious circle where businesses have also struggled creating more non-performing loans which weakens the banks as we see a doom loop in action.

What about now?

The GDP numbers gave us an idea of the areas involved on the contraction.

The quarter on quarter change is the result of a decrease of value added in agriculture, forestry and fishing
as well as in industry and a substantial stability in services. From the demand side, there is a negative
contribution by the domestic component (gross of change in inventories) and a positive one by the net
export component.

The latter part is a bit awkward for Prime Minister Conte who has taken the politically easy way out and blamed foreigners this morning. As to the industrial picture this morning;s PMI business survey suggests things got worse rather than better last month.

“January’s PMI data signalled another deterioration in Italian manufacturing conditions, with firms struggling in the face of a sixth consecutive monthly fall in new business. Decreases in output, purchasing activity and employment (the first in over four years) were recorded, marking a weak start to 2019.”

The spot number of 47.8 was another decline and is firmly in contraction territory.

Comment

This is as Elton John put it.

It’s sad, so sad (so sad)
It’s a sad, sad situation
And it’s getting more and more absurd

Italy has been in an economic depression for quite some time now but nothing ever seems to get done about it. Going back in time its political leadership were keen to lock it into monetary union with France and Germany but the hoped for convergence has merely led to yet more divergence.

One of the hopes is that the unofficial or what used to be called the black economy is helping out. I hope so in many ways but sadly even that is linked to the corruption problem which never seems to get sorted out either. Oh and whilst many blame the current government some of that is a cheap shot whilst it has had its faults so has pretty much every Italian government.

 

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