One of the themes of this blog has been that the economy of Italy has struggled through the credit crunch period as the initial impact was added to by the Euro area crisis. Unfortunately this exacerbated the issues raised by the fact that in the supposedly good times that preceded it, Italy only managed weak economic growth of around 1% per annum. So it had been left vulnerable by its past performance and then found itself in a reinforcing crisis where economic contraction put pressure on the government’s fiscal deficit and both led to rises in its national debt to Gross Domestic Product ratio. At the end of 2013 this had risen to 132.6% or if you prefer was then 2.069 trillion Euros.
So a success of past Italian policy which was that its fiscal deficit had been brought under some control was lost. It found itself in a familiar Euro area cycle where economic weakness pushed the fiscal deficit higher which required austerity which weakened the economy further and repeat. The best way of highlighting what has gone on is to point out that GDP in 2013 was lower than that in 2000. If we use 2005 prices then 2000 saw 1.367 trillion Euros and 2013 saw only 1.365 trillion Euros.
Accordingly Italy is on the edge of having a smaller economy than when it joined the Euro which is a very far cry from the promises made then. The impact per person is worse that this as back on the 1st of January 2000 the resident population of Italy was estimated at 56.9 million whereas on the same day in 2013 it was 59.69 million. So less economic output has been divided amongst 4.9% more people as we wonder why there have not been more protests about this in Italy. Or to put it another way I think that this qualifies as being called an economic depression.
As 2013 progressed the general outlook improved which has continued into 2014 so Italy would have hoped to join in with this along the lines of a rising tide lifting all boats. Whilst quarterly economic growth of 0.1% may not be much this performance in the last quarter of 2013 was the first positive reading for nine quarters. But the recovery theme has struggled to gain traction in Italy.
In the first quarter of 2014 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.1 per cent with respect to the fourth quarter of 2013 and by 0.5 per cent in comparison with the first quarter of 2013.
So another quarter of contraction with only a glimmer of better news from the annual comparison.
Will the black or shadow economy help?
We have analysed and debated this issue many times before but the last 24 hours has provided some light relief. From news.com.au
Italy to include drug and prostitution money in GDP calculations.
Zerohedge has covered this subject in its own inimitable style too.
Hookers And Blow: How Changing The Definition Of GDP Officially Jumped The Shark
Max Keiser has joined the fray also.
Stacy Summary: By these measures, Afghanistan, Colombia and Mexico will move into the G8 next year.
As ever there is some truth and some what might politely be called poetic licence going on here. I have written several posts on the expected impact of the new “improved” accounting standard ESA-10 which arrives in the autumn across most of Europe and Italy is expected to be one of the smaller gainers from this with its addition to recorded GDP likely to be between 1% and 2%. The main mover here is the treatment – I would argue double-counting of research and development – which of course is much less newsworthy than coke and hookers! But even if we ran with that theme Italy is not being fairly treated here as for example my own country the UK expects a larger boost of between 3% and 4%.
Although if we look back in time it is clear that Italy has been running with a more favourable interpretation of GDP for some time which I guess surprises precisely no-one.
In the midst of this news.com.au does give us some estimates for the black economy in Italy.
The Bank of Italy in 2012 estimated the value of the criminal economy at 10.9 per cent of GDP……The ‘grey economy’ of businesses that do not pay taxes is already calculated in Italy’s GDP and was estimated to be worth between 16.3 per cent and 17.5 per cent of the economy in 2008 — the last year for which the calculation was made.
Trying to measure such a concept is fraught with obvious difficulty but if pressed I would suggest that they are likely to be on the low side. I would be interested in reader’s thoughts on this subject.
What is the latest evidence?
This morning’s release was yet another disappointment.
In March 2014 the seasonally adjusted retail trade index decreased by 0.2% with respect to January 2014 (-0.4% for food goods; the non food goods index was unvaried). The average of the last three months compared to the previous three months decreased by 0.3%.
The unadjusted index fell by 3.5% with respect to March 2013.
The underlying index is now at 94.8% of the average for 2010 as we note that so far domestic demand is not recovering at all in Italy. This is unlikely to be helped by this.
In April, the index of hourly contractual wages remains unchanged from the previous month and an increase of 1, 2% in relation to April 2013.
According to Reuters this is the lowest reading this series has had which is a phrase that feels it is on repeat in the credit crunch era especially in the area of wages. However you spin it such levels are unlikely to provide a boost to domestic demand, although with consumer inflation so low (0.5%) there has been a nudge higher in real wages.
What about the future?
Yesterday’s business survey based on purchasing managers are optimistic for the Euro area as a whole.
(Euro area) GDP looks set to rise by 0.5% in the second quarter after the lacklustre 0.2% rise in the first three months of the year.
Some care is needed with such optimism though if we recall that they expected 0.4% GDP growth in the quarter just gone. If we look at Italy specifically we see that the retail and service sectors are fairly stagnant.
Italy’s retailers recorded only a marginal dip in sales in April, the slowest for more than three years,
Service sector output increased in April, driven higher by a further rise in new business and reversing a marginal contraction in activity one month earlier…..Meanwhile, job shedding continued.
Although the outlook is considerably brighter for manufacturing.
Growth in Italy’s manufacturing sector gathered pace in April, with businesses signalling the fastest expansions in output and new orders for three years.
If we look at the economic experience of Italy in this century it is clear that it has been quite a disappointment which of course coincides with its membership of the Euro. This is now being reinforced by the fact that the recovery which the overall Euro area is experiencing has only moved Italy’s economy up to flatlining. So far expectations have been positive but the actual numbers disappoint. This leaves Italy extremely vulnerable to any future slow downs and hoping that the recent retreat in the value of the Euro to the mid 1.36s will not only continue but last so that her exporters get a boost.
Perhaps a boost will come when Italy plays England in the World Cup as Italians will advance more confidently on that than us English. As to an economic boost from coke and hookers actually Italy is a relative loser here in the international GDP “improvement” league table and there is food for thought in the fact that even in the murky world of football tables are seldom revised for the past! Also Italy will be ruing the fact that the Euro area set 120% of GDP as a national debt benchmark when Greece hit trouble as unless it can sustain some economic growth it will move ever further above that level.