A pleasant feature of 2017 has been the way that the economy of Italy has at least seen a decent patch. Although sadly the number this morning has been revised lower.
In the third quarter of 2017 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.4 per cent with respect to the second quarter of 2017 and by 1.7 per cent in comparison with the third quarter of 2016
The improved economic outlook for the Euro area has pulled Italy with it although you may note that even with it the numbers are only a little better than the UK so far in annual terms and we of course are in a weaker patch or an economic disaster depending what you read. In fact if you look at annual growth Italy has been improving since the beginning of 2014 but for quite some time it was oh so slow such that the annual rate of growth did not reach 1% until the latter part of 2015 and it is only this year that it has pushed ahead a bit more. Back in 2014 there was a lot of proclaiming an Italian economic recovery whereas in fact the economy simply stopped shrinking.
Girlfriend in a coma
This means that in spite of the better news Italy looks set in 2017 to reach where it was in terms of economic output between 2003 and 2004. This girlfriend in a coma style result has been driven by two factors. First is the fact that the initial impact of the credit crunch was added to by the Euro area crisis such that annual economic output as measured by GDP fell by 8.5% between 2007 and 2014. The second is the weak recovery phase since then which has not boosted it much although of course it is now doing a little better.
If we look ahead a not dissimilar problem seems to emerge. From the Monthly Economic Outlook.
In 2017 GDP is expected to increase by 1.5 percent in real terms.The domestic demand will provide a
contribution of 1.5 percentage points while foreign demand will account for a negative 0.1 percentage
point conterbalaced by the contribution of inventories (0.1 pp). In 2018 GDP is estimated to increase
by 1.4 percent in real terms driven by the contribution of domestic demand (1.5 percentage points)
associated to a negative contribution of the foreign demand (-0.1 percentage points).
When ECB President Mario Draghi made his “everything it takes ( to save the Euro)” speech back in 2012 he might have hoped for a bit more economic zest from his home country. Even now with the Euro area economy displaying something of a full head of steam Italy does not seem to be doing much better than its long-term average which is to grow at around 1% per annum. That is in the good times and as we noted earlier it gets hit hard in the bad times.
The girlfriend in a come theme builds up if we recall this from the 4th of July.
If we move to a measure which looks at the individual experience which is GDP per capita we see that it has fallen by around 5% over that time frame as the same output is divided by a population which has grown.
There will have been an improvement from the growth in the third quarter but we are still noting a fall in GDP per capita of over 4% in Italy in the Euro era. So more than a lost decade on that measure. As I have pointed out before Italy has seen positive migration which helps with future demographic issues but does not seem to have helped the economy much in the Euro area. For example net immigration was a bit under half a million in 2007 and whilst it has fallen presumably because of the economic difficulties it is still a factor.
During 2016, the international net migration grew by more than 10,000, reaching 144,000 (+8% compared to
2015). The immigration flow was equal to nearly 301,000 (+7% compared to 2015).
Putting it another way the population of Italy was 56.9 million when it joined the Euro and at the opening of 2017 it was 60.6 million. So more people mostly by immigration as the birth rate is falling have produced via little extra output according to the official statistics.
The labour market
If we switch to the labour market we see a reflection of the problem with output and GDP.
In October 2017, 23.082 million persons were employed, unchanged over September 2017. Unemployed
were 2.879 million, -0.1% over the previous month.
So only a small improvement but the pattern below begs more than a few questions.
Employment rate was 58.1%, unemployment rate was 11.1% and inactivity rate was 34.5%, all unchanged
over September 2017.
There are of course issues with a double-digit unemployment which has as part of its make-up an ongoing problem with youth unemployment.
Youth unemployment rate (aged 15-24) was 34.7%, -0.7 percentage points over the previous month
If UB40 did a song for youth unemployment in Italy it would have to be the one in three ( and a bit) not the one in ten
Also the employment rate is internationally low which is mostly reflected in a high inactivity rate. The unemployment rate in Italy is not far from where it was when it joined the Euro.
It was only last week I looked at the ongoing problems of the Italian banks and whilst they have had many self-inflicted problems it is also true that they have suffered from a weak Italian economy this century. So they have suffered something of a double whammy which means Banca Carige is trying to raise 560 million Euros with the state of play being this according to Ansa.
Out of the main basket Carige, closed the trading of rights to raise capital, it remains at 0.01 euros.
A share price of one Euro cent speaks rather eloquently for itself. If you go for the third capital increase in four years what do you expect?
Italy is not especially fiscally profligate but the consequence of so many years of economic struggles means that the relative size of the national debt has grown. From it statistics office.
The government deficit to GDP ratio decreased from 2.6% in 2015 to 2.5% in 2016. The primary surplus as a percentage of GDP, equal to 1.5% in 2016, remained unchanged compared to 2015.
The government debt to GDP ratio was 132.0% at the end of 2016, up by 0.5 percentage points with respect to the end of 2015.
For those who recall the early days of the crisis in Greece the benchmark of a national debt to GDP ratio was set at 120% so as not to embarrass Italy (and Portugal). As you can see it misfired.
Italy has particular reason to be grateful for the QE bond buying of the ECB which has kept its debt costs low otherwise it would be in real trouble right now.
Although on the other side of the coin Italians are savers on a personal or household level.
The gross saving rate of Consumer households (defined as gross saving divided by gross disposable
income, the latter being adjusted for the change in the net equity of households in pension funds reserves)
was 7.5%, compared with 7.7% in the previous quarter and 9.0% in the second quarter of 2016.
The issue with the Italian economy is that the current improvement is only a thin veneer on the problems of the past. It may awake from the coma but then doesn’t seem to do that much before it goes back to sleep. The current economic forecasts seem to confirm more of the same as we fear what might happen in the next down turn.
One part of the economy that is doing much better is the manufacturing sector according to this morning’s survey released by Markit.
Italy’s manufacturing industry continued to soar in
November as strong external demand, especially
for capital goods, continued to underpin surging
levels of output in the sector.
“Capacity subsequently came under pressure, as
evidenced by the strongest recorded rise in
backlogs of the series history. Companies again
added to their staffing levels as a result.
Let us hope that this carries as we again wonder how much of the economic malaise suffered by Italy is caused by output switching to the unregistered sector.
Me on CoreTV Finance