The economy of Italy remains a “Girlfriend in a Coma” sadly

It is time for us to take another trip to the beautiful country that is Italy and touch base on economic developments there. The mainstream view is that it is on the edge of an economic boost and that would be welcome indeed as Italy has struggled for quite some time and in fact throughout its period of Euro area membership. The number below was one of the reasons why the former editor of the Economist magazine Bill Emmott described it as like a “girlfriend in a coma”.

between 2001 and 2013 GDP shrank by 0.2%. (The Economist)

Back on the 18th of May last year I took a step back and decided to look beneath the aggregate position described there to discover what the experience of the average or ordinary Italian would be and the numbers were even more shocking.

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.

We have discussed on here before the issue of how you define a depression well I would say that the GDP per capita numbers for Italy indicate that it has been in one for this century and hence its period of Euro membership. Putting it another way it has done worse than Greece.

Today’s GDP data

Back on the 24th of November last year I expressed my fears about what was taking place  in terms of GDP growth and the mathematical sequence which was building up.

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.

Spurious accuracy or not it would appear that the trend is still your if not Italy’s friend.

In the fourth quarter of 2015 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.1 per cent compared with the third quarter of 2015 and by 1.0 per cent in comparison with the fourth quarter of 2014.

Let us start with what appears at first to be good news. From Nick Kounis at ABN Amro.

The ‘good’ news is that this is above ‘s trend growth rate of zero

However when you think about it perhaps it is not such good news. Also the growth such as it is has relied on external demand which is good but of course the troubled start to 2016 means that it is not going to be so easy to repeat.

If you would like some perspective then at 2010 prices the earliest quarter in todays report is the first in 2011 when GDP was 405.5 billion Euro’s as opposed to the 387.2 billion Euro’s of the quarter just gone.

Other hard data

There had been a warning shot fired by the industrial production data which was released on Wednesday.

In December 2015 the seasonally adjusted industrial production index decreased by 0.7% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was -0.1.

That meant it was 1% below where it had been in December 2014. This seems to have been a general issue in December where we have now seen quite a list of countries producing poor industrial production figures. The adjusted series seems to be in a bit of disarray with the seasonal one at 91.4 and the calendar adjusted one at 79.7 compared to the unadjusted 81.8 but all are well below the 2010 benchmark.

This added to disappointing labour market data.

In December 2015, 22,470 million persons were employed, -0.1% with respect to November 2015. Unemployed were 2,898 million, +0.6% over the previous month.

Previously the situation has been improving but December saw the unemployment rate edge up to 11.4%.

Retail sales nudged 0.3% higher in November but there was much less cheer in the underlying numbers.

The average of the last three months remained unchanged with respect of the previous three months.

The unadjusted index decreased by 0.1% with respect to November 2014.

Putting it another way retail sales are at 95.4 compared to 2010 which again takes us back to the theme of an economic depression.

The promise of recovery

The mainstream media has been pushing this line for a while that the reforms of Prime Minister Renzi will see an economic boost. Some of this was captured by the Markit purchasing managers indices as shown below for December manufacturing.

December’s 57- month high of 55.6,

The catch is of course that we now know the actual data was for a contraction meaning that it is hard to know what to make of the January figures.

The first batch of PMI data for 2016 showed a cooling in the rate of growth in the manufacturing sector

The same was true of the service sector which was supposed to be booming in December except the actual GDP figures missed it. Retail sales forecasts are less optimistic.

The headline seasonally adjusted Markit Italy Retail PMI® fell to 47.9 in January from December’s 50.2, signalling a drop in sales for the third time in the past four months.

The official monthly report for January told us this.

The economic outlook for households and enterprises appears to evolve in different ways; disposable income is expected to rise for the former. The growth in economic activity does not yet entail an overall improvement in production among sectors. The economic leading indicator, however, remains positive in November.

There is a genuine question as to why the improvement in real wages and disposable income has not led to a better result for consumption and domestic demand.


This is of course headed by an Italian Mario Draghi and a highly expansionary policy does seem to suit Italy. Although if course it relies on the fact you have to believe that monetary policy has traction. Added to that the falls in the Euro exchange rate have been replaced by rises leaving it not far off (-1%) where it was a year ago. As of the end of January the ECB had purchased some 87.8 billion Euros of Italian debt meaning that it is helping the fiscal deficit via keeping funding costs low. Frankly in the circumstances ultra-low.

So if the pedal is not already to the metal we have plenty of promises from Mario that he will put it there next month. Of course that leaves us with the troubling view that Italian economic growth should be accelerating not braking.

Italian banks

Back on the 21st of January I pointed out that the Italian banks were in trouble and this meant that they would be of limited help in improving the economy. Well today the Economist magazine has caught up.

No country is more impaled on this dilemma than Italy. The gross value of non-performing loans makes up a whopping 18% of their total lending; retail investors own some €200 billion of bank bonds, equivalent to 12% of GDP. A government plan to buy bad debts from the banks at close to face value would fall foul of European rules against “state aid”. But selling the loans at a significant discount would force Italian banks to recognise losses, some of which could be borne by retail investors.


Let me finish with some cheer which is that Italy has a large black or undeclared economy although of course things like drugs and prostitution are counted these days. The moves to ban the 500 Euro note will perhaps be of interest to organised crime like the Mafia but I would guess that they would be a few steps ahead of it. But the theme of being like a girlfriend in a coma continues and some of the contradictions are welcome but not all as identified by the Kooks.

But uh oh, I love her because she moves in her own way





16 thoughts on “The economy of Italy remains a “Girlfriend in a Coma” sadly

  1. Shaun, what are the latest figures on Italy’s debt and the yield on their bonds? I read somewhere (maybe it was you) they have large gold reserves, unused?

    • Hi Foxy

      According to the Bank of Italy the size of the national debt was some 2.21 trillion Euro’s as of the end of November 2015 and that puts it at a bit over 132% of GDP. When you look at the situation it is hard to believe that the ten-year yield is 1.65% so they owe a nod of thanks to Mario Draghi and his QE.

      I believe the Bank of Italy has some 2451.8 tonnes of Gold so it will be enjoying the recent rally.

  2. I’m curious. All this desire for inflation. It’s not like it’s hard to achieve. We’ve known how to cause it for at least a couple of hundred years, print money. So why not print money and use the proceeds to pay off maturing debt (at face value – no premium), until inflation gets into the right ballpark (we know it’s not an exact science). At a stroke there are 2 benefits, inflation increases, and the national debt (and therefore the cost of servicing it) falls a little

    How does this inflation help the economy though?

    • They are printing money on a grand scale. Large scale purchases of bonds are obscuring the market -> so that the traditional indicator of bond interest will not give an early warning. So there is a risk of inflation overshoot. Bond yields over 10% would be economically painful.

      PS. I don’t believe inflation helps – it misdirects investments away from productive enterprise.

    • ‘All this desire for inflation. It’s not like it’s hard to achieve. We’ve known how to cause it for at least a couple of hundred years, print money. ‘

      Velocity isn’t a constant though.

      Printing money and using it to cancel out Govt Bonds would -I think-be the equivalent of a default and trigger CDS pay outs and all sorts of balance sheet mayhem.Also foreign buyers would duck out fearing a currency collapse.

      Although,in the end I think that’s what they’ll have to do.How is Japan ever going to pay their debts?

  3. Great blog, Shaun, as usual.
    On an unrelated topic, I didn’t understand Andrew Lydon’s comment on the RPI CPI User Group website about Polish regional CPIs. He kindly sent me a workbook with Polish price data. The point he was making was that although the Poles have monthly consumer price series for their 16 voivodeships (similar to provinces), they aren’t so useful since virtually all owner-occupied housing costs are excluded from the measures. Andrew lives in the West Midlands. The responses he has been getting from the other members of the Group so far are all in the vein: the ONS publishes a housing price index for the West Midlands, so why do you need a consumer price series for the West Midlands? An HPI for the West Midlands is a necessary building block to a consumer price series for the West Midlands, but surely not an adequate substitute for one.

    • Hi Andrew

      Firstly I agree that regional price/inflation indices would be a good idea if they could be done relatively cheaply. I think that the debate has got confused though and suspect that the replies are implying that prices in the UK are homogenous (i.e are the same everywhere). That is true for many but not all with obvious exceptions such as islands and so on. But even so there are variations as petrol and diesel prices at the pump for example do very. Also prices are higher in city centres like London.

      i suspect they are focusing on house prices because there are obvious differences there not only in prices per housing unit but also inflation rates.

      I am sure that Canada is much more heterogenous.

      Meanwhile you may be amused by some of my shopping as I bought some apple juice using a brand which claims it is grown and crushed etc in Suffolk. Anyway I could buy 1.5 litres for £2 or 0.9 litres for £2.10. As they used to say on The Outer Limits “Do not adjust your sets”.

  4. Hi Shaun
    Italy in depression since 2000. And yet, and yet……You go there regularly I believe, does it ‘look’ like its in depression? Maybe south of Rome it feels a bit poorer than before, maybe, but northern Italy, really? I know this is just anecdotal but you mention the size of the black economy.
    Sitting in Florida typing this I have been made aware of the size of the black economy in this state. Some believe it is as high as 33%. One person in an extended family is ‘legal’ , appears on state records for house ownership, taxation, social security etc, every one else is ‘black’. Its sort of accepted there is ‘one leg in and one leg out’ for a sizable percentage of the population. Its how the state’s economy works.
    Clearly there are differences, Florida has a migrant population , but Italy has had decades to refine its methods of subterfuge and as times get tougher the attractions of getting ‘blacker’ become irresistible.
    None of the above is to deny that Italy has a growing problem, just that the official stats are probably almost completely useless.

    • Hi JW

      The economy of Italy reminds me of the Winston Churchill statement “It is a riddle wrapped in a mystery inside an enigma;” He was referring to Russia but in fact Russia seems clearer these days.

      As to official statistics the UK produced its almost entirely useless construction series today. It may with the weaker industrial production numbers lead to a nudge down in GDP growth. But I will stick to counting cranes…….

  5. Shaun, you may remember several years ago the selloff of expensive Italian registered cars by owners with modest taxable incomes. This should be a warning that the Italian GDP numbers need a large margin for error.

    I’d also suggest that Italy has many Romanian & Bulgarian immigrants who compete for unskilled work pushing labour costs down. Some Italians suffer and others benefit.

    • Hi ExpatInBG

      There are issues here as I have just been discussing with JW. Also on a more anecdotal nature I was looking to establish a business deal with someone in London who decided in the end that a media life in central London was inferior to a life in Rome. When a little while after I asked how things were going? The reply was “Great the rent is a 1/3 of what I was paying in London and I can live well much more cheaply……” Other stories of how things there are ahem economical with the truth appeared.

      • Purchasing power is highly subjective ….. and there are items / stuff that may be rare or unavailable. I ski most winter weekends very cheaply – Londoners pay thru the nose for a ski weekend away. Car costs take up a greater portion of my pay, but I win big on housing costs.

        To additionally illustrate the weather quality of living item, on holiday in Rome, we sat outside in a restaurant and enjoyed a fabuluous lunch – London has far fewer days when dining al fresco is nice.

  6. Shaun,

    o/t do you know when the UK/West abandoned cash reserve lending and moved onto Basel 1(was that the cause of the end of cash reserve lending?).Do you know a place I could learn about it?

    Thanks if you can help.

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