Oh Italy! When will your economy escape its economic depression?

Today has opened with economic growth news across much of Europe and including the Euro area. Of course people are keen to know the numbers are several of the countries involved are right on the margin of positive and negative growth. However as I explained to listeners of Share Radio earlier I counsel some caution as we are placing more pressure on these numbers than they are capable of dealing with. These are preliminary estimates which do not have the full data set and there is a margin for error with them which is widely ignored. This is even before we get to the question of whether Gross Domestic Product numbers provide the right answers to our economic questions.

Euro area leaders will no doubt have heaved a sigh of relief when they were told (probably yesterday) that Germany had grown by 0.1%, France by 0.3% and the Netherlands by 0.2% as that is just over half the Euro area economy. With Spain (which is something of a home banker at the moment) having already declared an anticipated 0.5% economic growth Euro area leaders were quickly safe from the headlines of an overall contraction. However there was some food for thought with one stereotypical move and one being very anti-stereotype. The stereotype was that France saw this.

General government expenditure increased by 0.8% in the last quarter (after +0.5%)

What price austerity now? If we move onto the reverse we see that the German economy was driven by domestic consumption and that this happened.

gross fixed capital formation especially in machinery and equipment in the third quarter was considerably down on the previous quarter (adjusted for price, seasonal and calendar variations).

At least German export growth remained to keep one stereotype going!

However there is still a shark in the water which is will the Euro area economy contract in the fourth quarter of 2014? Or if you like the game goes on which is the fundamental question for the Euro area right now. Can it escape the black hole which keeps pulling it back towards zero and at times negative economic growth? Otherwise more and more Euro area members will be singing along with David Byrne and Talking Heads.

We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride

Oh Italy!

First let us examine the headline announcement which tells a by-now familiar tale of woe.

In the third quarter of 2014 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.1 per cent with respect to the second quarter of 2014 and by 0.4 per cent in comparison with the third quarter of 2013.

But Shaun you told us that such small numbers are within the margin for error? They are but you see it is now some twelve quarters in a row since Italy has had a positive  annual economic growth rate. Putting it another way the last time its economy grew quarter on quarter was in the early summer of 2011 and it was by the not so giddy heights of 0.2%! The initial dataset goes back to the first quarter of 2010 when Italian GDP (based to 2005) was 397.36 billion Euro’s and this latest quarter it was some 3% smaller at 385.3 billion.

Some perspective

Newer readers may not be aware that the economy of Italy struggled to grow even in the supposedly better economic climes of the pre credit crunch era. If you like you can call it the Italian problem and it is one of the themes of this blog. Accordingly Italy arrived at the credit crunch in poor shape and the situation has gone from bad to worse. It is being rammed home right now as of course as I pointed out only yesterday with regards to Greece this is the “recovery” period.

In fact Italy has been in an economic depression for some time now. If we look at its annual GDP it was some 0.5% lower in 2013 than it was in the year 2000. Now we know that its economy has also been shrinking so far in 2014 so the situation is even worse now. There was a discussion on here a while ago as to what the definition of a depression is, well I think we have found at least part of it. This also means that Italy is in “lost decade” territory and that this has extended almost to a decade and a half now. Many of you will have spotted that this period of economic decline has coincided with its period of Euro area membership. It would seem that Beppe Grillo.

Beppe Grillo, the leader of the Italian Five Star Movement, has visited the European Parliament to present his programme to get a referendum in Italy on leaving the euro “as soon as possible”.

Is it not a sign of the times that even a comedian can spot what politicians cannot?

There is a grimmer measure of the depression which has hit Italy which is to factor in the population growth which has taken place over this period. The Italian population has expanded by just under 7% over this period so we can say that GDP per person has now fallen by around 8% this century. I think that is a measure of a depression and frankly in all respects.

Did ESA 10 help?

The “improvements” did raise Italy’s level of GDP by 3.7% in 2011 which was used as the base year. Recorded investment surged by 6.9% as we discovered what sort of impact double-counting Research and Development has! Also some of you will no doubt be waiting for this bit.

(including the inclusion of some illegal activities, which contributed 1.0 percentage points to the revaluation of the Gdp)

Imagine the boost to Italian GDP if they could fully account for the activities of the Mafia?! Taxing it might prove to be more than a bit of a problem though.

The national debt

This mornings bulletin from the Bank of Italy tells us that the national debt is 2.134 trillion Euros. If we compare that to the central government revenue of 464.75 billion Euros in 2013 we see that the ratio is 4.6 which of course is unstable.

As we stand this is just about affordable because Italian government bond yields are so low right now. The benchmark ten-year yield is 2.39% as I type this which is remarkably low considering the public-sector data. It would not take much of a rise for Italy’s position to look very different and on such a road there would have to be some form of default. Because of the size of Italy’s national debt this would be a very serious matter way beyond Italy’s borders.

We may be explaining to ourselves here why the European Central Bank under the leadership of the Italian Mario Draghi is considering some sovereign bond Quantitative Easing or QE.


The state of play for the economy is best summed up by its statistics agency Istat and remember such forecasts are invariably rose-tinted.

In 2014, GDP is expected to decrease by 0.3 percent, expanding by 0.5 percent in 2015 and growing by 1.0 percent in 2016, in real terms. The recovery will be mainly driven by domestic demand.

They do at least manage a promise of some jam tomorrow but it is not much is it? Also we find that for Italy such optimism disappears time and time again as tomorrow becomes today. Maybe it already has as the domestic demand growth has morphed into this below if Markit are correct.

Retail sales fell at faster rate in October, with the gap between actual performance and targets the widest in three months…..This relentless downturn in trading is affecting all those involved in the industry, with jobs being cut and suppliers seeing orders for goods dropping markedly.

So on and on it apparently goes and it is such a shame as it is a beautiful country with much to recommend it. But economic reform is not one of those things.

Songs for the Italian economy 

Road to Nowhere by Talking Heads

I started out with nothing and I ‘ve still got most of it left! by Seasick Steve

Down,Down by Status Quo

Deeper and Deeper by Madonna

Other suggestions welcome…..


20 thoughts on “Oh Italy! When will your economy escape its economic depression?

  1. By Jove Shaun, I think you are on to something!
    Government by comedians is the answer. They have just the qualities we need. Smart, intelligent, think on their feet. Good ripostes, excellent public speakers, comfortable addressing an audience without an auto-prompt. In addtion they’ll have held down at least one proper job in the real world and probably have a far better grasp of economic and social issues than any of our present crop of leaders.

    • Hi Michael and welcome to my corner of the blogosphere

      I would welcome anyone with experience of the real world as opposed to our current crop of politicians and technocrats. As to comedians and politics I think that Italy has the edge on us as Beppe Grillo has made an actual impact. By contrast Russell Brands anti-corporatist stance was damaged by his suggestion they should pay a 20% tax, not quite so hot when the current corporation tax rate is 21%! As Fleetwood Mac put it “Oh Well”

  2. ‘Imagine the boost to Italian GDP if they could fully account for the activities of the Mafia?! Taxing it might prove to be more than a bit of a problem though.’

    Taxing is one thing, collection something else again!

    Thanks for another thought provoking post Shaun. Your insights and analysis seem to me to be consistently on the money.

  3. Nicea pieceah Shaun

    How about “Free fallin”by Tom petty and the Heartbreakers.

    The last two lines might apply to Beppe Grillo

    Wanna fall out intonothin

    Wanna leave this world for a while

  4. Hi Shaun.

    Taking you back to 1978, or three and a bit recessions ago.

    Johnny Mathis and Denice Williams – Too Much, Too Little, Too late.

    • Hi therrawbuzzin

      There is a verse in hat song which seems to describe Euro membership for Italy.

      “Boy it make-a me sick, everyting I gotta do
      I can’ta getta no kicks, always gotta follow rules
      Boy it make-a me sick, just to make-a lousy bucks
      Gotta a feela like a fool”

  5. I do wish that official agencies would just start telling the truth saying “it’s bad and next year it will be the same/worse” instead of all this boring “things can only get better” next year nonsense.

    • Maybe we should try agency capitalism. People can register a firm & website and make their own predictions, with prizes going to the most consistently accurate and/or best methodologies.

      The “job for life” bureaucracy under political orders model is blatantly failing and offers very poor value for taxpayers money.

      • I think the problem is their political masters being displeased about the numbers, giving them back and telling them to redo them, particularly projections, until the “right” answer is arrived at.

  6. By the way Shaun, there is something else I think should be said for balance, which is that the EZ has grown 0.8% since last year. Whilst it’s quite poor it is growth and the subject of yesterdays post – Greece has grown 0.7% in Q3, cos lets face it, Greece needs all the growth it can get.

    Overall, as I saw the numbers come in, I was mildly pleased, tinged with the sentiment that they’ve got to do a lot better but hopefully this will be a start.

    Narrow money started going up in Q2 2014 by my calculations and I said here or at MM a while ago that I expected the EU generally to increase activity in the first half of 2015, beyond that I don’t know but it looks to me like things may be starting to improve. Lets hope so.

    • Hi Noo2

      I had a good look at the Greek numbers yesterday so let me reply fully. The Greek statistics agency has reestablished its seasonal adjustment series and on that basis each quarter in 2014 so far has shown quarterly growth (0.8%,0.3% and now 0.7%). Reverting to the underlying numbers Q3 in 2014 was 1.7% larger than a year before. So pleasing but still 26% below the previous peak.

      The other potential boost to output (being current smothered by the deflation theme) is that the oil price has dropped by around a quarter.

      • Thanks for reminding me about what I consider to be the artificial boost to GDP of disinflation, I had forgotten and viewed in that light the numbers aren’t very good (what’s going to happen when inflation picks up again? WHICH IT WILL IN THE NEXT 6 MONTHS) but at least there is some “improvement”. I hope the Greeks can build on this.

  7. All this chronic can-kicking false-optimism double-speak from our leaders is placing me in a bewilderment. For clarity, without the dope and hookers GDP additions, is the whole of Europe – including the UK – now in recession? Are commodities tanking as though we’re in a world-wide slump? Is powerhouse Germany struggling to manage 0.1% growth? And why on Earth do we still have emergency low interest rates? And if you’ll permit me a literary allusion, rather than musical:

    is this the tide coming in, or the tide going out?

    • Hi Peter

      The ESA 10 improvements to GDP calculations tended not to have a major effect on growth rates as they raised the whole curve upwards. Over longer periods there was a minor growth impact but this was spread over a long time. Was it enough to wipe out the 0.2% growth of the Euro area I doubt it? Perhaps it did affect Germany which was at 0.066% if we look deeper as a little less would have had it at zero.

      Meanwhile as to our leaders that have pumped out some real “false-optimism double-speak” from down under in Brisbane.

      “The combined growth strategies of G20 member nations presented at the Brisbane Leaders’ Summit will equate to 2.1 per cent new growth and inject an additional $2 trillion into the world economy and create millions of jobs.”

      Apple pie for all too? What’s the betting that they will have forgotten this by next weekend?

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