Today I wish to take a look again at the state of play in the Italian economy and see if it remains “the girlfriend in a coma” as described by Bill Emmott who used to be editor of the Economist. The documentary he made especially the interview with Silvio Berlusconi who you may not be surprised to read promised quite a bit in an interview and the delivered nothing! Was revealing and sad. As to the concept let me give you an illustration from my article on the subject from the 18th of May.
between 2001 and 2013 GDP shrank by 0.2%. (The Economist)
Very thin pickings from the Euro area and it gets worse if we move from the aggregate number to try to get an idea of the individual experience as I did back then.
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.
Once you look at it like that it is a surprise that there has not been more protests in Italy about the state of play.This is because a weak aggregate performance becomes quite a decline per person or capita. Let us bring everything up to date.
The latest economic growth
Form Istat Italy.
In the third quarter of 2015 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.2 per cent with respect to the second quarter of 2015 and by 0.9 per cent in comparison with the third quarter of 2014.
Firstly let us welcome the fact that Italy has economic growth and the fact that it has had it for each quarter of 2015 now. However there is a rather ominous pattern for 2015 so far as it has gone 0.4%,0.3% and now 0.2% which is a clear trend. Of course there is spurious accuracy at play but it is hard not to at least wonder about it.
What the economic growth in 2015 has done is wipe out the 12 year decline the Economist pointed out as the latest quarter had GDP of 387.2 billion Euros and 2013 was oddly extremely consistent with each quarter in the 385 billion Euros (these numbers are based on 2010).
Thus as we stand the Euro era has provided economic stagnation for Italy on an aggregate level and declines per person.
Shouldn’t 2015 have been better?
On Friday ECB President Mario Draghi was busy slapping himself on the back for his monetary policies but it is hard not to think of Italy reading the quotes below.
We cannot say with confidence that the process of economic repair in the euro area is complete……..this is the weakest euro area rebound since 1998; and the recovery remains very protracted in historical perspective…..If our current assessment is correct, it will take the euro area 31 quarters to return to its pre-crisis level of output – that is, in 2016 Q1.
These words echo in Mario’s home country as if we stay with the last point when will Italy return to its pre crisis level of output? If we look at it in annual terms the peak was in 2007 when annual GDP was 1.688 trillion Euros. After the initial hit Italy bounced back but sadly the Euro area crisis saw it sink again and GDP in 2014 was 1.535 trillion Euros or 9% lower which at current growth rates will take quite some time to recover. That is on the optimistic assumption that the outlook is bright and to coin a phrase “the only way is up baby”.
Also whilst Mario was slapping himself on the back and proclaiming the success of his policies Italy will have benefited from the fall in oil and commodity prices that began in the late summer of 2014. Of course around a third of that has been offset by the fall in the value of the Euro- Mario is a bit less clear on this consequence of his actions.
Thus we have a lower exchange rate, lower input prices, negative official interest-rates and as of the end of October purchases of some 61.3 billion Euros of Italian government bonds. This has led to a situation that seems unrelated to either the Italian economy or its public finances as Mario Draghi pointed out to Il Sole 24 Ore at the end of October.
The interest rate on two-year Italian securities is near zero;
Should Forward Guidance have any impact on the real economy then we are plainly being signalled a cut in the main ECB interest-rate below -0.2% plus more QE next month. With the Euro below 1.07 versus the US Dollar we can see that there has already been an impact on the financial one.
We find as we assess things that there have already been disappointments for 2015 and by that I mean that only in October the Bank of Italy told us this.
Economic activity in Italy has been expanding since the beginning of 2015, at an annualized rate of about 1.5 per cent.
Yet I note that it suggested overall economic growth would be less than 1% in 2015 which in the circumstances is not good and if we return to the recovering ground lost point means not this decade.
If we look to the business surveys then they are managing some optimism as shown below.
Italian manufacturers registered a solid start to the fourth quarter, with output and new orders both rising at robust and accelerated rates in October……Italian service sector activity rose for the eighth consecutive month in October, supported by solid and accelerated growth in inflows of new business.
A consequence of the economic difficulties has been persistently elevated unemployment.
At the same time, the unemployment rate fell to 11.8%. The drop was associated with an increase of inactive people rather than with employees.
Let us take the good news first which is that employment has risen and unemployment has fallen which is nice to see. However it remains high and is falling only slowly plus there are concerns if the recent improvement is merely a category shift from unemployed to inactive.
There has also been consistent wage growth which feeds into real wages with inflation so low. Although care is needed as these only cover formal agreements which cover about 60% of the situation.
Compared with October 2014 the hourly index and the per employee index increased by 1.2 per cent.
The Girlfriend in a Coma theme came from someone who plainly likes Italy and was sad to see that its economic growth pattern was so poor. Let me echo that as I like Italy too. A subtitle was Good Italy:Bad Italy and the former is easy to see if you visit the place with the latter shown by today’s article. Whilst it would be great to proclaim that there has been a fundamental change there it is hard to see many signs.
A consequence of this has been that the debt burden of the Italian state has risen and risen. It seemed symbolic when it rose above 2 trillion Euros in the spring of 2013 and is more like 2.2 trillion now. If the economy struggles then the ratio to GDP rises which is has done and is now 132.8% according to the Bank of Italy. Due to the exertions of the ECB with its QE purchases there is no financial crisis and Italy has the benefit of borrowing cheaply. But kicking the debt can via QE only works in the longer-term if Italy grows at a decent rate.
A more hopeful thought is that the shadow economy is helping out considerably. Back in 2013 the IEA estimated it as just under 22% of the economy although oddly they thought it had shrunk in the Euro area from 27%. This means that Italy’s Euro era performance is even worse! Of course since then some of the shadow economy (drugs and prostitution) have become formal economic agents. Is there an Italian equivalent for “hard-working families”? So we are left hoping that in recent times the Italian shadow economy has seen a boom. Otherwise it has been in quite a long lasting depression.