How will Italy cope if its economy shrinks again?

Over the past few says the Standard and Poors ratings agency has been running its slide rule over Italy and yesterday in his final press conference Mario Draghi of the ECB indulged in some trolling.

No, of course not. Things have changed completely and frankly, everybody now in Italy said and stated that the euro is irreversible. So while there may have been hypothetical doubts in one part of the governance of the country, there aren’t any more, so it’s been accepted.

I am not sure if that was a promise or a type of threat! The problem with this sort of rhetoric though had already been highlighted by Mario himself.

 Incoming economic data and survey information continue to point to moderate but positive growth in the second half of this year.

It was in the bit where he felt the need to point out that growth would be positive and was perhaps a response to this from Markit earlier that day.

The eurozone economy started the fourth quarter
mired close to stagnation, with the flash PMI
pointing to a quarterly GDP growth rate of just
under 0.1%………Optimism about future prospects deteriorated further in October to the lowest for over six years,

They had even dragged Mario into it.

The survey indicates that Mario Draghi’s tenure at
the helm of the ECB ends on a note of near-stalled
GDP, slower jobs growth, near-stagnant prices and
growing pessimism about the outlook.

As you can see they gave a different picture which was of marginal/no growth that looked set to deteriorate. Actually Mario was worried about that too if we look further down his speech.

The risks surrounding the euro area growth outlook remain on the downside. In particular, these risks pertain to the prolonged presence of uncertainties, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets.

Also whilst Markit did not give specific detail for Italy this was troubling.

The rest of the euro area saw a near-stalling of
growth, with output rising at the weakest pace since
the current upturn began in August 2013

What about Italy?

This reminds me of something from the French statistics office that I quoted on Wednesday.

Italian economic growth has remained almost non-existent for more than a year (0.0% in Q2 after +0.1% in Q1).

If you are already not growing and things are getting worse that has a clear implication and it takes us back to our “Girfriend in a coma” theme for Italy. This is where it does not fully participate in economic upswings but sadly does in downswings.

If we look at the area that causes the most concern around the world right now the Italian statistics office told us this earlier this month.

In August 2019 the seasonally adjusted industrial production index increased by 0.3% compared with the
previous month. The change of the average of the last three months with respect to the previous three
months was -0.3%.  The calendar adjusted industrial production index decreased by 1.8% compared with August 2018 (calendar working days being 21 versus 22 days in August 2018).

The manufacturing sector declined by 2.8% on a year ago and the manufacture of transport equipment fell by 6.9%.

So the pattern here was of recovery in 2015 followed by growth in 2016 and 17 but the growth slowed at the beginning of 2018 and has turned into declines. The underlying index is at 104.9 where 2015=100 so we see that the growth spurt is slip-sliding away.

The problem is that there is another catch.

The unadjusted industrial new orders index decreased by 10.0% with respect to the same month of the previous year (-4.0% in domestic market and -16.3% in non-domestic market).

This meant that the seasonal adjustment needed to do some quite heavy lifting to get us to this.

The seasonally adjusted industrial new orders index increased by 1.1% compared to July (+1.1% in domestic market and +1.0% in non-domestic market); the average of the last three months decreased by 1.6% compared to the previous three ones.

The Banks

If Italy is to change its economic path then it needs a reformed banking sector but as this from Reuters highlights we are back to the same old problems.

 Italy wants to shield Monte dei Paschi (BMPS.MI) from bad loan losses as it prepares the bailed-out bank for a sale, but faces resistance from European Union competition authorities, two sources close to the matter said.

Yep we are back to the world’s oldest bank which to link to the start of this story has operated much of this century under what are called the Draghi Laws. As ever the can is being kicked via a Special Purpose Vehicle or SPV.

Sources have told Reuters the Treasury wants to lower the impaired debt ratio to 5% by spinning off some 10 billion euros in problem loans that would be merged with the assets of Treasury-owned bad loan manager AMCO.

We find ourselves taking a trip into a type of fantasy land yet again.

Monte dei Paschi values debts unlikely to be repaid in full at just over half their nominal value and its worst performing loans at 38%.

That compares with an estimated average price of 27% of nominal value for soured loan transactions in Italy this year, a Banca IFIS report states.

How much? Well here is another way of putting it.

One of the sources said a sale would imply a 1.5 billion euro loss for Monte dei Paschi, hurting the bank’s minority shareholders but not the Treasury, which would benefit from the lower transfer price since its controls 100% of AMCO.

This is a situation that we have observed time and time again in the Italian banking crisis. This is where fantasy numbers are used to fudge the situation but sooner or later they end up facing reality. In this case it is minority shareholders in Monte Paschi who would take the punishment and remember they may well recall being told by Prime Minister Renzi that the bank was a good investment.

Fiscal Position

On Monday we got a reminder that it is not the fiscal deficits that are a problem for Italy.

The government deficit to GDP ratio decreased from 2.4% in 2017 to 2.2% in 2018. The primary surplus as a percentage of GDP was 1.5% in 2018, up by 0.2 percentage points with respect to 2017.

The government debt to GDP ratio was 134.8% at the end of 2018, up by 0.7 percentage points with respect to the end of 2017.

We have had a lot of political rhetoric about it borrowing more but overall Italy has not. The picture has been confused by Eurostat’s inability to produce seasonally adjusted numbers for Italy but the unadjusted ones are if anything lower than in 2018.

In the short-term it remains very cheap for Italy to borrow with its ten-year yield being a mere 1.01%. That is amazingly cheap in the circumstances and can only represent the expectation of being able to sell to the ECB at a higher price as there is a genuine danger of a downwards spiral in an economic slow down.


We find that the ongoing Italian economic weaknesses such as low growth in the good times and a banking sector full of zombies ready for Halloween leave it exposed to any economic downturns. It is a lovely country and on some viewings has economic strengths as the Bank of Italy reports.

Exports continued to increase in the second quarter, despite the contraction in international trade. The current account surplus rose further, to 2.8 per cent of GDP; foreign sales may have faltered in the following months.

But this leads to another fail for economics 101 as this should lead to economic dynamism except in Italy it never does.

Economic activity in Italy increased only slightly in the second quarter and, in the light of the available data, it could have remained almost stationary in the third……..There is still the risk that the unfavourable developments in industry will be transmitted to the other sectors of the economy.

Any further weakness in economic growth will put even more pressure on this.

The Government estimates net borrowing at 2.2 per cent of GDP this year, the same as in 2018. The debt-to-GDP ratio is expected to rise from 134.8 to 135.7 per cent of GDP.

So whilst I wish Mario Draghi a happy retirement it is also true that his tenure at the ECB has done little for his home country and via the way policy has been tilted towards an increasingly zombified banking sector may in fact have made things worse.

the next fact can be swung several ways.

Since 2015, the resident population has been decreasing, setting up a phase of demographic decline
for the first time in the last 90 years. At 31 December 2018 the population amounted to 60,359,546
residents, over 124 thousand less than the previous year (-0.2%) and over 400 thousand less than four
years earlier.

On the positive  side it helps GDP per person and fewer people must help the green agenda. On the negative side an ageing and shrinking population is less able to deal with the sizeable national debt.








12 thoughts on “How will Italy cope if its economy shrinks again?

  1. The short answer is not very well. German consumer morale dips to its lowest in 3 years, and Germany is expected to be in recession in the third quarter:

    The contagion is spreading, world growth is slowing down and each country is going to be affected in different ways but looking at what Shaun has outlined in todays BLOG the future isn’t looking at all good.

    • Hi Peter

      I fear for Italy because it misses out on the good times but then fully participates in the bad. So let me add something which is both good and bad. Below is what used to be called the black then the grey and now the non observed economy.

      “In 2017 NOE generated value added for about EUR 211 billion (compared to 207.7 bln. in 2016), with an increase of 1.5% to the previous year, a slower growth than total value added (+2.3%). Hence, the weight of NOE on GDP was slightly reduced from 12.2% in 2016 to 12.01% in 2017, confirming the downward trend that has been ongoing since the peak reached in 2014 (13%).” ( Italy Statistics Office)

  2. Well, despite all the brickbats Germany gets as beneficiary of a supposedly undervalued Euro, who in their right minds would opt to join a fully formed banking union with some of these countries where literally loans have been doled out to mates in a fraudulent manner even decades before the Euro was even a twinkle in anyone’s eye. The mafia infest even the Pope’s bank.

  3. I came back from Sicily recently. I was quite shocked. Desperately poor – but expensive. The people appear to have given up hope as seen by the lack of care in their local environs. And due to their poverty, their land is now criss crossed with rubbish brand new roads to nowhere, plastered with the obligatory EU logo that is an emblem of their poverty.

    Reading Lonely Planet Guide, apparently over 70% of local businesses pay ‘pizzo’…a sort of protection money paid to the mafia but which is more than that because it is there to ‘oil the wheels’ to get permits, planning permission etc. from local government offices. Defrauding the EU’s CAP is rife and of course unemployment, particularly youth, is through the roof with youth unemployment standing at 57% according to Eurostat.

    Answers to their problems on a postcard.

    • Hi Hotairmail

      A couple of elections ago it was reported that Silvio Berlusconi’s party had won 62 of the 63 southern Italian parliamentary seats leading to suggestions that there has been “encouragement” to vote for him.

      As to prices I cannot resist pointing out we are told there is no inflation.

      “In September the Italian harmonized index of consumer prices (HICP) increased by 1.4% compared with the previous month and by 0.2% with respect to September 2018 (down from +0.5%); the flash estimate was +0.3%. The increase on monthly basis was mainly due to the end of summer sales of Clothing and footwear (+32.6% compared with August 2019), which are not taken into account in the national index NIC.”

      No inflation for ages and yet things are expensive, which of course is one of my basic themes.

  4. As we include prostitution and drug dealing in our GDP figure, do the Italians include the Mafia’s contribution to their economy? It’s reported that 1 in 10 workers are members, even in big business. Maybe, Italy has the best economy in Europe, if the criminality is included!

    • Hi Foxy

      I can partly answer with the rest of the update I gave to Peter. From the statistics office.

      “In 2017 the value added generated through the illegal activities included in NA accounts for EUR 18.9 billion, an increase of 0.8% to the previous year. The households final consumption expenditure (HFCE) of illegal goods and services amounted to EUR 20.3 billion, an increase of 0.9% to 2016.”

  5. Hi Shaun

    Italy is hemmed in by having a revalued currency when it entered the Euro, interest rates that are set elsewhere and a Stability and Growth Pact that prevents it from using fiscal policy to the extent it might like.

    Leaving the Euro is, in my view, not an option; it would be cataclysmic. What’s left? Internal devaluation along the lines of the German Hartz IV reforms in the early 2000.

    However, the EZ is slowly inching towards a crisis and will probably be forced to ditch the SGP and a good many other things to meet the problems.

    The absence of fiscal and banking union will begin to tell but the occurrence of crises was always foreseen when the Euro was introduced. Are you familiar with the term “tumbling forward”? It means that in a crisis the EZ members will have to get together and solve crisis and, with each crisis, more and more of the necessary architecture will be put in place. It’s no way of managing affairs of course but it’s probably the only way to create a fiscal union which the Germans will resist mightily. It is hugely risky but probably the only way.

      • Think about Brexit; Italexit would be Brexit cubed – because of the Euro!

        I believe the Euro is doomed, unless it can complete its architecture and that will require a huge crisis because it will never be done voluntarily.

        The current downturn could deal, if mot a mortal blow, a severe blow and this might result in an organised exit. I don’t think the EU would like this, in fact they’d resist it mightily, because the Euro is a symbol of unity and sovereignty and to see a flagship emblem of the EU fail would be catastrophic. On the other hand they may have little choice.

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