Turning Japanese the Italian Way

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by Shaun Richards

We have become familiar with the economic problems which have beset Italy this century. First membership of the Euro was not the economic nirvana promised by some as the economy grew by only around 1% per annum in what were good years for others. Then not only did the credit crunch hit but it was followed by the Euro area crisis which hit Italy hard in spite of the fact that it did not have the housing boom and bust which affected some others. It did however have something of a banking crisis which the Italian establishment ignored for as long as it could and indeed is still ignoring as much as it can. This all meant that the economic output ot GDP of Italy started the Covid-19 pandemic at pretty much the same level as it was when it joined the Euro.  If we move to a measure which looks as the individual experience which is GDP per capita it was around 5% lower as the same output is divided amongst a population which has grown. There is an irony in that as Italy looking forwards has a demographic problem via its ageing population but so far importing a solution to that has seemingly led to few if any economic benefits. Up until now the Italian economy has lived up or in many ways down to the description of “Girlfriend in a Coma ”

As we look forwards we see that Italy faces nearly all of the economic problems of our times and some of our deepest fears. In essence the opening paragraph above describes something of a Japanification, except Japan has in many respects done better. We have an ossified banking sector which only ever seems to bring bad news. Or rather one where any good news ( the Atlante or Atlas bailouts) ends up making things worse, and that is before we get to Prime Minister Renzi telling Italians that Monte Paschi was a good investment back in 2016. There is the elevated level of unemployment which I have estimated at 12% rather than the official 7.4%. Next comes the relatively large national debt which has been around 130% of GDP or Gross Domestic Product for a while now and debt will be surging as GDP falls in a double whammy effect. All of that is magnified by the way that economic recoveries in Italy keep being so weak meaning that any talk of a V-shaped recovery is likely to be just that, talk.

Where do we stand?

In my case right behind Italy as it is a lovely country but sadly the numbers are grim.The official monthly economic report cntined a new survey.

Pandemic impact on firms was sudden and exceptionally intense, causing serious survival risks. The 38.8% of
Italian firms (equal to 28.8% of employment, about 3.6 million employees, and 22.5% of value added, about 165
billion of euro) claimed the existence of economic and managerial factors which put at risk firms survival within the
year. In particular, the possibility of operative default is determined mainly by the sharp fall of revenues (over 50%
with respect to the same period of 2019, Figure 3), for 74% of firms and by the lockdown for 59.7% of firms.

That shows quite an impact although the rest of the report tried to be positive.

In May and June, the Italian indicators showed some improvements of economic activity following the strong decreases in March and April. In May, extra Eu exports increased and in June the confidence improvement was diffused to all sectors.

Recent data on incomes, consumption and labour market reflect the impact of expansionary policies, contrasting the fall of personal income that turned out in an increase of the saving rate in the first quarter and of retail trade in May. The decreasing trend of employment has continued although at moderate pace, while weekly working hours and unemployment rate increased.

As you can see “some improvements ” hardly match the previous “strong decreases”. The shift towards saving has become noticeable in this pandemic as workers receive furlough payments but either cannot or do not want to fully spend them. In another Japanese link the Italians have a strong savings culture.

Retail Sales

For all their faults retail sales give us a clue towards consumption data which we expect to be the driver of the hoped for recovery so here is Tuesdays update on this.

In May 2020 estimates for value of seasonally adjusted retail trade index rose by 24.3% in the month on month series, after plummeting at record levels in March and April, due to restrictions and temporary closure of stores during Covid-19 pandemic. Likewise, volume of sales grew by 25.2% when compared to the previous month. Therefore, estimates seems to confirm that retail trade reached a turning point in the Covid-19 crisis in April 2020 and partially started to recover from the loss in May 2020.

A not unexpected bounce as lockdown restrictions were eased but sadly we get a better perspective from the annual and quarterly comparison.

espite the increase in the month on month series, the underlying pattern in the three months to May 2020 shows a decline, as both value and volume of sales fell by 20.6% and 21.8% respectively.

When compared with May 2019, the value of sales dropped by 10.5% and the volume was down 11.9%

Comparing with the same month a year earlier, large-scale distribution fell by 4.4%, small-scale distribution decreased by 18.8% and non-store sales was down 23.0%. Notwithstanding the fall, these channels of distribution show a reduction of the year on year loss recorded in the two previous months.

By non-store sales they do not mean online which rose by 42%. The area hardesr affected has been clothing and footwear which saw falls of between 35 and 38 per cent depending which category you choose.

The Banks

A familiar topic on here, so let us open with a positive for their balance sheets

According to preliminary estimates, in the first quarter of 2020 the HPI (see Italian IPAB) increased by 0.9% compared with the previous quarter and by 1.7% compared with the same quarter of the previous year (it was +0.2% in the fourth quarter of 2019).

The increase on annual basis of HPI, the largest since the second quarter of 2011,

In ordinary times that would have the Governor of the Bank of Italy sending a Grazi note to Mario Draghi as he searches the official wne cellar for his favourite Chianti. But of course Mario has departed and so has any thoughts of house price growth looking ahead.

Much less positive has been the role of the banking sector in supporting business as this recent Bank of Italy working paper highlights.

Approximately 40 per cent of the decline in the stock of business loans after the financial crisis can be attributed to supply factors. Banks that had less liquidity, a riskier business model and were more connected to other financial players (because they belonged to a group) were also a potentially less stable source of funding for firms. Bank capital and the funding mix seemed to play no significant role.

That reminds us of a past issue the amount of bad or sour loans which is about to return. Frankly the one hope here is that the burden gets shifted to the taxpayer.  From an Italian point of view they would prefer this to be a Euro area one preferably the sort of Special Purpose Vehicle which does nor raise the national debt. Well until Eurostat tells them it does anyway.

Comment

The Italian situation is a curious type of turning Japanese as in many ways it is heading for an inferior version. I recall noting the issue of The Mafia and virgin olive oil which usally wasn’t and now I note reports of it being involved in the Italian hospital sector.  Japan also has organised crime but The Yakuza do not seem to be on the same scale.

Even this weeks forecast from the European Commission has struggled to find much positive here.

Output losses in the first two quarters are likely to be larger than assumed in spring, with real GDP forecast to
fall by 11¼ % this year. In 2021, the expansion will shift from a technical rebound to a more genuine recovery.
In addition, the quarterly profile over 2020 implies a substantial carry-over effect, contributing sizeably to
annual average output growth of 6% in 2021. However, real GDP is not expected to return to its 2019 level by
the end of 2021.

It is not so go when you are relying on carry-over effects rather than genuine growth and even with them only about half of the decline will be regained which makes the last sentence both odd and otiose. I do not quote the forecast because I think it will be accurate but because even the European Commission cannot find part one of Reasons To Be Cheerful, let alone the next two.

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