One of the economic themes of these times is the struggle of the Italian economy which has been in evidence throughout the Euro area. This has been exacerbated by the credit crunch which saw the Italian economy plunge to an annual growth rate of -6.9% at the beginning of 2009 then see the beginnings of a recovery which sadly soon ended as the Italian economy began to contract again as 2011 progressed. So it has been a long hard road which one might reasonably hope should have turned for the better in early 2015. This is because of the oil price fall that took place in the latter part of 2014 and also the fall in the exchange-rate of the Euro.
How is Italy doing?
Looked at in football terms this is a story of two halves so let us open with the positive one.
In the first quarter of 2015 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.3 per cent with respect to the fourth quarter of 2014.
Whilst the UK was disappointed to produce that particular number for Italy it represents the best quarter since the opening one of 2011. The weaker second half comes when we see that in fact it was required to stop the Italian economy being smaller than a year before.
unchanged in comparison with the first quarter of 2014
Indeed if we look for some perspective we see that back in 2011 the first quarter saw a Gross Domestic Product of 405.4 billion Euros (2010 base) whereas the opening quarter of 2015 saw one of 385.25 billion Euros. This means that the economy has shrunk by 5% over this period which is why from time to time we read of public protests and indeed riots in places like Milan and Rome.
Is this a new dawn for Italy? Well the Bank of Italy tries to put a positive spin in its economic bulletin but the numbers below remain weak especially if we remember that next year is always bright in official forecasts!
Italian GDP growth should exceed 0.5 per cent this year and be around 1.5 per cent next year
Not much is it? Especially if we factor in the oil price fall and that the Bank of Italy is rather bullish about the impact of the 130 billion Euros of Italian government bonds that it expects to buy as its share of the European Central Bank’s asset purchases or QE program.
the expanded asset purchase programme could raise GDP by more than one percentage point in 2015-16.
So without the favourable winds currently blowing the Bank of Italy would have expected yet another contraction in 2015 and perhaps 2016. Indeed its new indicator the Ita-coin is in fact somewhat downbeat.
In recent months Ita-coin has improved gradually but remains negative, thus reflecting both the advances and the difficulties that have marked the start of the economic recovery.
These show hopeful signs for Italian manufacturing.
Growth in Italy’s manufacturing sector gained further momentum in April, with faster increases in output and new orders recorded. Job creation was sustained, and at a sharp and stronger pace.
The job creation element of this will be especially welcome considering Italy’s persistent unemployment problem. This was reinforced by a stronger performance from the service sector too.
Italy’s service sector enjoyed a positive start to the second quarter, seeing business activity and inflows of new work rise at the fastest rates for ten months. The pace of job creation among services firms meanwhile quickened for the second month in a row, hitting a multi-year high.
Thus we have entered a period where the private-sector surveys are more optimistic than the official forecasts.
This is a strength of the Italian economy as this mornings data release indicates.
The trade balance in March amounted to +4.0 billion Euros (+487 million Euros for EU area and +3,573 million Euros for non EU countries).
Actually the numbers are flattered by the fact that the oil price had fallen but Italy does have strong industrial sectors one of which had an especially good March as exports of vehicles rose by 28% in March. As it happens the UK did its bit for the UK trade figures as we imported some 7.2% more in the first quarter of 2015 than we had in the same quarter a year before.
What about deficits and debt?
The problem here for Italy is not the size of its fiscal deficit outright which as you can see is a fair bit smaller than that of the UK. From the Bank of Italy.
In 2014, despite the contraction of output, general government net borrowing was practically stable at 3.0 per cent of GDP.
However the “contraction of output” has meant that the hopes of achieving some form of balance and maybe a surplus in this area have been regularly dashed. This means that the size of the national debt has continued to increase.
The ratio of debt to GDP rose by 3.6 percentage points to 132.1 per cent, reflecting among other factors the virtual stagnation of nominal output.
You may note the emphasis on “nominal output” which is yet another hint that central banks want higher consumer inflation to help with public debt burdens. Whereas both the Italian consumer and worker will welcome lower inflation and cheaper prices for fuel and energy.
We can consider this in terms of the Stability and Growth Pact rules where Italy is adhering to the 3% per annum deficit limit. However in the early days of the Greek crisis the Euro area used a national debt of GDP ratio of 120% as a threshold to avoid embarrassing Italy (and Portugal). For Italy 120% is long gone.
Putting it another way at the end of 2014 then Italy’s national debt at 2.135 Trillion Euros was some two and three-quarter times its annual government tax revenues.
North and South
The economic divergence between the North and South in Italy which I have analysed on here many times is quite marked. It provokes thoughts of its own Euro area style issues and is a reminder of how short its history as a united country actually is. The Economist has added to the debate with numbers like this.
But the main source of the divergence has been the south’s disastrous performance since then: its economy contracted almost twice as fast as the north’s in 2008-13—by 13% compared with 7%. Themezzogiorno—eight southern regions including the islands of Sardinia and Sicily—has suffered sustained economic contraction for the past seven years.
I often wonder if Italy could split into separate parts after all we are seeing such pressure in both Spain and the UK right now.
There is a direct comparison with the world of football right now as Juventus have reached the champions league final after a drought since Inter Milan did so (and won) in 2009. Can both or either continue this new trend? For the economy it is good to see that the private-sector surveys look positive albeit that the official one is less so. But somehow Italy needs to throw off the shackles that are described by the Economist below.
between 2001 and 2013 GDP shrank by 0.2%.
That statistic gets even worse when you allow for the fact that the Italian population was expanding over that period by around 7% so per person the situation was even worse.
So whilst I cross my fingers for what is a delightful country and people there are plenty of doubts as to what will happen as the boost from the oil price fall fades. Yet of course there is another perspective as Italy must look a land of gold and honey from the continent below it as otherwise so many would not be drowning in the Mediterranean Sea trying to get there. A very different perspective as they are obviously not bothered much by the clear risk of a default.