Retail Sales in Italy are struggling again

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by Shaun Richards

Last night it was a case of Forza Italia after the success in reaching the Euro 2020 ( yes we all know it is 2021) football final. It was an especially ice cold final penalty from Jorginho who is having quite a summer. Sadly the economic news is not hitting such heights.

In May 2021 estimates for seasonally adjusted index of retail trade slightly increased by 0.2% in value terms, likewise volume rose by 0.4% in the month on month series.( Istat)

As you can see retail sales have improved but not by much although if we take a bit more perspective things look a bit better.

In the three months to May 2021 value of sales increased by 3.3% when compared with the previous three month period, while volume was up 3.5%.

Although that more positive view comes with the kicker of an apparent slowing which is rather familiar to followers of the Italian economy. The annual comparison has slowed from the 30% growth of the previous month but of course such figures are very distorted a bit like being in a hall of mirrors at a fun fair.

Year on year, value of retail trade continued its growth, increasing by 13.3% and volume sales grew by
14.1% comparing to May 2020, when non-essential retail stores were partially closed due to pandemic
restrictions.

But we can learn something from this.

Despite the growth, in May 2021 total retail
sales levels for both value and volume were still lower than pre-pandemic levels of February 2020.

The May volume index was at 99 where 2015 was 100. So volumes are below where they were when the index was set and if we look at May 2019 at 99.4 slightly below it. This is rather different to the chart presented because it is for values and not volumes. Italy has had some sales growth since 2015 but in essence the inflation seen takes it away as we convert to volumes. So we are back in “Girlfriend in a coma” territory.

The pattern of changes is similar to elsewhere it is just there is less of it in total.

Looking at the value of sales for non-food products, all sectors witnessed growth apart from Computers and
telecommunications equipment (-4.0%). The largest increase were reported for Clothing (+82.3%) and
Shoes, leather goods and travel items (+59.7%).

National Accounts

At the beginning of the month we learnt that the numbers suggested the situation would be better now.

Gross disposable income of consumer households increased by 1.5% with respect to the previous quarter, while final consumption expenditure decreased by 0.6%. As a consequence, the saving rate was 17.1%, 1.8 percentage points higher than in the last quarter of 2020. In real terms, gross disposalble income of consumer households increased by 0.9%.

So there is money available to be spent.

Whilst we are here we can note that the state has been supporting the economy too.

In the first quarter of 2021 the GG net borrowing to Gdp ratio was 13.1% (10.6% in the same quarter of 2020).

Taxes were 41.6% of GDP but expenditure was 54.8%. This leads us to the national debt which was 155.8% of GDP at the end of 2020 and as of April was 2.68 trillion Euros.

Trade

This is something that at first sight looks a positive highlighted by the most recent data.

In May 2021 the trade balance with non-EU27 countries registered a surplus of 4,767 million euro compared
to the surplus of 4.114 million euro in May 2020; excluding energy, the surplus was equal to 7,681 million
euro, up compared with a 5,201 million euro surplus in May 2020.

The annual comparisons are of course distorted but my initial point is that Italy has run a consistent surplus. We have to go back to April for the full figures including the EU but we remain at this point with what looks like a success economy via its trade surplus.

As ever care is needed because exports have risen since the Euro area crisis but there is a familiar point about under performance here. That is in this instance relative to its peers. But we do see weak internal demand from the pattern of retail sales we looked at earlier and that would feed into imports.

This brings us to one of the debates which is between whether it is good to have a trade surplus or a deficit? The answer mostly comes from the Talking Heads lyric “How did I get here”. A surplus can indicate a competitive economy and there are parts of the Italian economy that deserve that moniker. But in a 2018 paper from the LSE it was suggested that things may have hit trouble there. The emphasis is mine

Importantly, we find evidence that misallocation has increased more in sectors where the world technological frontier has expanded faster when, in the wake of Griffith et al, we measure the speed of technological change in a sector by the average change of R&D intensity in advanced countries. Relative specialisation in those sectors explains why, perhaps surprisingly, misallocation has increased particularly in the regions of Northern Italy, which traditionally are the driving forces of the Italian economy.

In terms of scale the issue was/is very significant.

With these definitions in mind, we study the universe of Italian incorporated companies over the period from 1993 to 2013. We find strong evidence of increased misallocation since 1995 (see Figure 3). If misallocation had remained at its 1995 level, aggregate TFP in 2013 would have been 18% higher than its current level. This would have translated into 1% higher GDP growth per year, which would have helped to close the growth gap with France and Germany.

TFP is their productivity measure or Total Factor Productivity.

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Maybe it is linked to this issue.

Comment

The European Commission has just released an upbeat forecast starting with something not often written about Italy’s economy.

Economic activity proved more resilient than expected and increased slightly in the first quarter of this year,
despite stringent containment measures.

They now think this.

Performance data from the manufacturing sector and business and consumer surveys suggest that real GDP growth gained further momentum in the second quarter and should strengthen markedly in the second half of the year. On an annual basis, real GDP growth is expected to reach 5.0% in 2021 and 4.2% in 2022. The forecast for 2021 is significantly higher than in spring.

However one hope seems to be struggling if the retail sales numbers are a guide.

Private consumption is expected to rebound sizeably, helped by improving labour market prospects and the gradual unwinding of accumulated savings.

The overall picture looks very Japanese doesn’t it as we note the national debt, trade surplus and weak domestic demand? That brings us back to the Turning Japanese theme.

The Financial Times is bullish, however.

By April, goods exports were 6 per cent above January 2020 levels — the strongest growth rate of any major eurozone economy, compared with rates of less than 1 per cent in France and Germany. As a result, Italy’s goods trade surplus has surged since the start of the pandemic.

Although it is nice to see Italy outperform for once.

This is helping to ease the economic impact of the pandemic. Italy was the only major eurozone economy to grow in the first quarter of this year. Its output expanded by 0.1 per cent from the previous three months; by contrast, the eurozone as a whole logged a contraction of 0.3 per cent.

The problem for Italy remains that it does not grow much more than that in the good times.

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