Italy continues to see features of an economic depression

Today gives us an opportunity to compare economic and financial market developments in Italy as this week has brought some which are really rather extraordinary. Let us start with the economics and look at the IMF ( International Monetary Fund ) mission statement yesterday.

Real GDP growth in 2019 is estimated at 0.2 percent, down from a 10-year high of 1.7 percent in 2017.

As you can see they are agreeing with my theme that Italy struggles to sustain any rate of economic growth above 1% per annum. Then they also agree with my “Girlfriend in a Coma” theme as well.

 Real personal incomes remain about 7 percent below the pre-crisis (2007) peak and continue to fall behind euro area peers. Despite record employment rates, unemployment is high at close to 10 percent, with much higher rates in the South and among the youth. Female workforce participation is the lowest in the EU.

The real income situation is particularly damning of the economic position especially if we note that unemployment has continued to be elevated. That brings us back to the economic growth not getting above 1% for long enough for unemployment to fall faster.

What about now?

The IMF has a go at saying things will get better but then lapses into the classic quote of a two-handed economist.

The economic situation is projected to improve modestly but is subject to downside risks.

So let us see if the detail does better than it might go up or down?

Real GDP growth is forecast at ½ percent in 2020 and 0.6-0.7 percent thereafter. These forecasts are the lowest in the EU, reflecting weak potential growth. Materialization of adverse shocks, such as escalating trade tensions, a slowdown in key trading partners or geopolitical events, could lead to a much weaker outlook.

As you can see there is not much growth which frankly in measurement terms would take several years even to cover any margin of error. I also note a rather grim ending as the IMF maybe gives us its true view “could lead to a much weaker outlook.” Another slow down or recession would be a real problem as we note again that real personal incomes are 7% lower than before. If that is/was the peak then how long will this economic depression go on?

The Euro zone

If we look wider for en economic influence the news is not that good either. For example the situation from the overall flash Markit PMI business survey was this.

The ‘flash’ IHS Markit Eurozone Composite PMI®
was unchanged at 50.9 in January, signalling a
further muted increase in activity across the euro
area economy. The rate of expansion has remained
broadly stable since the start of the final quarter of
2019, running at the weakest for around six-and-ahalf years.

If we now move to my signal for near-term economic developments the ECB told us this yesterday.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 8.0% in December from 8.3% in November.

The money supply situation had improved in 2019 but as you can dipped at the end. So the impetus is weaker than it was. In case you are wondering we have seen this before in phases of QE which is currently 20 billion Euros a month and thus boosting the numbers. There are other influences as well.

The broader money supply had a sharper fall and represents the outlook for 2021/22.

The annual growth rate of the broad monetary aggregate M3 decreased to 5.0% in December 2019 from 5.6% in November, averaging 5.4% in the three months up to December.

We will have to see if this is a new development or just a financial market glitch.

The annual growth rate of marketable instruments (M3-M2) was -7.2% in December, compared with -1.1% in November.

Back to Italy

The troubled area across much of the world is the industrial sector and the latest we have on that is this from the Italian statistics office.

The seasonally adjusted volume turnover index (only for the manufacturing sector) remained unchanged
compared to the previous month; the average of the last three months increased by 0.3% compared to
the previous three months. The calendar adjusted volume turnover index increased by 0.2% with respect
to the same month of the previous year. ( November )

This morning there was troubling news for those of us who have noted that employment has often been a leading ( as opposed to the economics 101 view of lagging) indicator in the credit crunch era.

The estimate of employed people decreased (-0.3%, -75 thousand); the employment rate went down to
59.2% (-0.1 percentage points).
The fall of employment concerned both men and women. A rise is observed among 15-24 aged people (+6
thousand), people aged 25-49 decreased (-79 thousand), while people over 50 remained stable.

This meant that if we look for some perspective progress seems to have stopped.

In the fourth quarter 2019, in comparison with the previous one, a slight increase of employment is registered (+0.1%, +13 thousand) and it concerned only women.

We will have to see if that continues as we worry about possible implications for this.

The number of unemployed persons slightly grew (+0.1%, +2 thousand in the last month); the increase
was the result of a growth among men (+2.2%, +28 thousand) and a decrease for women (-2.2%, -27
thousand), and involved people under 50. The unemployment rate remained stable at 9.8%, as also the
youth rate, unchanged at 28.9%.

Italian bond market

If we return to the IMF statement the story starts badly.

 Italy needs credible medium-term consolidation as fiscal space remains at risk.Debt is projected to remain high at close to 135 percent of GDP over the medium term and to increase in the longer term owing to pension spending. If adverse shocks were to materialize, debt would rise sooner and faster.

Somehow in the current economic environment the IMF seems to think that more austerity would be a good idea. Amazing really!

But this week has in fact seen this.

Massive, massive move in #Italy’s 10-year bond yield from 1.44% to 0.95% now. A 50 basis point move in a matter of days party driven by a #Salvini right-wing loss in regional elections. ( @jeroenblokland ) 

These days almost whatever the fiscal arithmetic we see that investors are so desperate for yield they will buy anything and hope the central bank will step up and buy it off them for a profit. Just as a reminder back around 2012 the yield went above 7% on fears the fiscal position suggested Italy was insolvent which of course were self-fulfilling as a yield of 7% made sure it was. But apart from QE what is really different now?


The depth of the problem is highlighted by this from the IMF.

Steadfast implementation of structural reforms would unlock Italy’s potential and durably improve outcomes. Reforms to liberalize markets and decentralize wage bargaining should be prioritized. They are estimated to yield real income gains of about 6-7 percent of GDP over a decade.

That’s a convenient number isn’t it? But the real issue is that this is a repetition of the remarks at the ECB press conference which are repeated every time. Why? Nothing ever happens.

The longer the economic depression goes on then the demographics become a bigger issue.

The number of births continues to decrease: in 2018, 439,747 children were registered in the General Register Office, over 18,000 less than the previous year and almost 140,000 less than 2008.

The persistent decline in the birthrate has an impact above all on the firstborn children, who decreased to 204,883, 79 thousand less than 2008.

Italy is a lovely country but the economics is an example of keep trying to apply the things that have consistently failed.

The Investing Channel




What sort of a future awaits UK living-standards?

One of the features of the credit crunch era has been the feeling that we as individuals have not done as well as the aggregate official statistics tell us. One way of looking into that is to note that GDP per capita or person has underperformed the GDP figures during this time.

GDP per head is now 1.8% above the pre-downturn peak in Quarter 1 (Jan to Mar) 2008, having surpassed it in Quarter 4 2015…..

This contrasts with 8.6% above on the overall GDP numbers and it surpassed its previous peak in Quarter 4 2013. That was a change because as we ran into the credit crunch the per person number was doing better that the total.

Another way of looking at this is to examine the pattern of real wages. Even according to the official data ( which uses the CPI measure of inflation that ignores owner-occupied housing) real wages went negative in the middle of 2008 and did not return to positive territory until near the end of 2014. Whilst the improvement was welcome the worrying part was that it was much more to do with a lower level of recorded consumer inflation than any improvement in wage growth. This of course is concerning at a time when we are expecting higher inflation this year the theme of which was reinforced by the fact that inflation in Germany has reached 2.2% and even worse for living standards it was driven by rises in prices for two absolute essentials which are energy and food. But looking back real wages posted negative year on year changes for 25 quarters which contrasts with a general increase of 2% per annum before the credit crunch era. The UK statisticians have done a specific calculation for 2002-07 and it in fact averaged 1.9%.


The Institute for Fiscal Studies has looked into these and suggested this today.

As is now well documented, incomes in the UK fell sharply in the immediate wake of the Great Recession, and have recovered only slowly since. The latest available data show real median income in 2014–15 just 2.2% above its 2007–08 level. This poor performance is largely due to wages (and ultimately productivity) – the large falls in real wages that characterised the recent recession and the weakness of real pay growth since.

In fact the numbers are boosted by pensioner’s incomes which we know have been boosted by the triple lock on the basic state pension for example. The picture deteriorates if we exclude that.

among the rest of the population, average incomes were essentially the same in 2014–15 as back in 2007–08.

They use 2014-15 because the official data has only reached there but they use other data to tell us where we are now and here it is.

The Labour Force Survey (LFS) indicates employment growth of around 1.6% in both 2015–16 and 2016–17. LFS earnings data suggest a 2.4% real rise in average earnings in 2015–16, but available LFS data for 2016–17 combined with the OBR forecast suggest that real earnings growth has slowed to 0.6% in 2016–17, thanks to both weaker nominal earnings growth and higher inflation. Taking these together, we project growth of 3.4% in real median income between 2014–15 and 2016–17.

So since the credit crunch hit real median incomes have risen by 1%, please do not spend it all at once! As we look forwards the picture is for more of the same.

The net effect of all these changes in earnings, employment and benefits is that in our central scenario, real median income is essentially unchanged for two years between 2016–17 and 2018–19.

So we remain on what is in essence a road to nowhere. I will go further and say that the experience has depended much more on what inflation has done than wage growth. When inflation falls we get real wage growth and when it rises we do not and if it is goes further we get falls. By contrast wage growth has not responded much to either the rise in employment or fall in unemployment meaning that the output gap style theories so clung to by the Ivory Towers and the Bank of England have yet another problem with reality.

Looking forwards to 2021

There is an obvious click bait element in projecting  this to 2021 but there is a large catch which is that the work uses the forecasts of the OBR or Office of Budget Responsibility. Regular readers will be aware that the first rule of OBR club is that it is always wrong. So please take more than a pinch of salt with this and maybe the whole cellar.

Beyond that, the steady rise in real earnings growth forecast by the OBR, and the (assumed) ending of the working-age benefit freeze in 2020–21, push up real median income growth for the last three years of the projection to an annual average of 1.2%. Taking the seven years from 2014–15 to 2021–22 as a whole, real median income grows by an average of 1.0% per year in our central projection – a cumulative increase of 7.4%.

Something else is then added which is to assume that the credit crunch had not happened and project the trend before it forwards. This has the problem it ignores the fact that it was an unsustainable boom but even so a little light is shed.

The falls in median income after the recessions of the early 1980s and early 1990s took it 8% and 9% respectively below its long-run trend up to that point. In our central projection, as outlined above, median income in 2021–22 is 18% below its long-run trend.


Some of you may be wondering about the number below?

Median income among pensioners, however, was 11% higher in 2014–15 than in 2007–08.

Actually there is a core existing group of pensioners who have not done so well but they have been joined by something of a golden generation who seem to have done rather well. The obvious examples that spring to mind are Baron King of Lothbury with his ~£8 million pension pot and Professor Sir Charlie Bean with his ~£3.5 million one ( although as ChrisL points out in the comments below they would affect an average measure more than a median one). Plus of course they have been handed post retirement jobs.

Housing Costs

There is some fascinating analysis of this which departs from the official claims in two ways as shown below.

However, in this report, we follow the HBAI methodology in deflating BHC and AHC incomes using different (appropriate) variants of the CPI. BHC incomes are deflated using a variant that includes mortgage interest payments (MIPs), dwellings insurance and ground rent, while AHC incomes are deflated using a variant of CPI that excludes rent. ( BHC = Before Housing Costs and AHC = After Housing Costs).

CPI does not have mortgage interest payments although in my opinion it should have both them and house prices. So maybe my influence has reached the IFS! Even more so when they exclude the rent which of course we are told will be used to measure owner-occupied housing costs as part of CPIH in a week and a bit.


As ever we find that once we look below the headline data the situation deteriorates for the ordinary person. The “lost decade” principle appears as we note that there must be more than a few people who have real incomes less than ten years ago although most have gained a little if not much. As we break the groups down we see that those who have been retiring recently have been something of a golden generation which looks unlikely to be repeated.

So small gains which sets the tempo for now although there are dangers of a dip as inflation rises. If we are lucky we will arrive in the next decade having gained a little bit more but with the rider that economic life regarding wages and incomes is far from what it was.