With employment falling so fast how can Italy’s economy recover?

Yesterday saw something of a reversal in Italian financial markets. Her government bonds fell with her benchmark ten-year yield rising from 4.33% to 4.47% and the FTSE-MIB equity index fell by 3.5% to 16,706. Even the previously super strong Euro which of course Italy shares with her partners in the project dipped to below US $1.35 and allowed the pound to recover back into the 1.16s. One likely cause of this was the fact that the man responsible for the “Berlusconi effect” on Italian financial markets appears possibly able to live up to the Terminator’s “I’ll be back” claim or perhaps given his age Lazarus might be a better . But it is also true that the Italian economy has not lived up to the billing provided by the rise in her bond and equity markets since the late summer of 2012. Whilst the appointment of the Italian Mario Draghi to the Presidency of the European Central Bank led to monetary promises (Outright Monetary Transactions) which boosted financial markets so far economic reality has only seen a decline.

Today’s data


In modern economies -or perhaps I should say what we thought were modern economies- the services sector is by far the largest component. Accordingly the survey numbers from Markit below make grim reading for Italy.

January saw Italy’s service sector output contract at a faster rate, – falling from December’s post of 45.6 to 43.9 in the first survey period of the year.

So we see that on a number bench marked for no change at 50 Italy was already seeing a substantial decline which has now deepened. So worries about the end of 2012 have built further for the beginning of 2013. As we digest this we see that it has also come with a very unpleasant addition. The emphasis is mine.

Reflecting the sustained (and accelerated) decrease in business activity, Italian service providers continued to slash staff numbers during January. Moreover, the decline in employment over the month was the most marked since data collection commenced over 15 years ago.

This brings me to the labour market figures released on Friday.

Istat estimates that 22.7 million persons were employed in December 2012 (provisional data). Employment rate was 56.4%, unemployment rate 11.2% and inactivity rate 36.4%.

We see from those numbers that employment in Italy had fallen by 104,000 in December which in itself represented quite an acceleration in the 278,000 fall for the year as a whole. We face the prospect of further falls in Italian employment in January and we also know that in the credit crunch era employment changes have been a good signal for what is likely to happen next.

Strangely given the numbers above unemployment only rose by 4,000 in December but with the unemployment rate already being 11.2% then the falls in employment being documented will push it higher into something of a danger zone as 2013 starts.

What about manufacturing?

There may be a slight sigh of relief at the numbers below being better than the services ones.

The downturn in Italian manufacturing continued to ease at the start of 2013, as signalled by a rise  to 47.8 in January, up from December’s mark of 46.7.

So better but we note than even so Italian manufacturing contracted in January and it has been contracting since October 2011. Also in spite of trying its best to exude optimism the report told us something that is getting familiar.

Italian manufacturers cut staffing numbers at a solid and slightly accelerated rate during January. That extended the ongoing spell of net job losses in the sector to a year-and-a-half.

So we see yet more cuts in employment. We also see that retail sales and domestic demand take some of the blame here.

A key element in this weakness remains falling consumer spending

Of course falling employment and domestic demand tend to come hand in glove and neither will be helped by further applications of Euro area style austerity. Unfortunately that is set to happen.

Retail Sales

We know that they have been falling in Italy and fell at an annualised rate of 3.1% in November. However many of her neighbours have already produced numbers for December too and the outlook for Italain exports to them does not look bright on the basis of them.

In December 2012 compared with November 2012, the volume of retail trade fell by 0.8% in the euro area and by 0.6% in the EU27……….In December 2012 , compared with December 2011, the retail sales index dropped by 3.4% in the euro area and by 2.0% in the EU27

There is nothing in there that looks optimistic and oh how Eurocrats must hate having to look at numbers showing that rather than growth it is in fact doing worse than its near neighbours who are outside it!

Does consumer confidence help?

In January the confidence climate index decreased from 85.7 to 84.6.The decrease was notably explained by personal and future climate that cut from 90.7 to 89.3 and from 78.0 to 77.1.

This number has been weakening lately and if we compare 84.6 to the benchmark of 2005 representing 100 we see it was already giving a poor reading. Interestingly the number for assessing Italy’s economic situation is -135! However we do not get any more detail than that.

What about wages?

We do have figures for contractual agreements in Italy which represent around 70% of the  labour market.

Compared with December 2011, the hourly wage index increased by 1.7 per cent while the per employee index increased by 1.6 per cent.

So they are rising but we know that real wages are if anything more important so let us also use today’s inflation numbers.

In January 2013, the Italian harmonized index of consumer prices (HICP)  rose by 2.4% with respect to January 2012

So different time periods but a familiar fall in real wages albeit a smaller one than in some countries.

Also if we look back we have an interesting addition to the capital/labour debate. Both the numbers above are based in 2005. If I tell you that the wages index is 118.2 and the inflation one at 116.9 we see that over the past 7/8 years there has been barely any growth and if we look at prospects we have to face the possibility and even probability of it going negative.


We see from the data that it is the labour market which is flashing amber and maybe even red for Italy’s economic prospects in 2013. The business survey numbers are already hinting at a weak first quarter for economic output but of course we have February and March to come. But for me we see very weak employment trends which were in existence at the end of 2012 but have got worse and these are a signal for the first half of 2013 and maybe beyond. If we add in weak wage growth we see that the labour market is a contractionary influence and as we recall how useful a prescient indicator it can be the concerns build.

Other factors could help Italy as in exports or a falling oil price but we also know that the former will have been hindered by the strong Euro and the latter has in fact risen in recent times. So we are in danger of a by now sadly familiar downwards spiral as Euro area austerity deepens a downturn into a slump. In such a case the theme of my January the 14th update her large national debt, will be an increasing concern. On such a road a debt haircut or default is by no means inconceivable.

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  • Rods

    Hi Shaun,

    Another excellent post.

    I see yesterday an inconvenient truth emerged that led to a minor market correction – reality!

    Many in the press at the moment seem to be saying that the worst of the Euro crisis is over, but with the underlying fundamental economic divergence and trade imbalances with a deepening recession / depression on top there is much more to run on this. With the high unemployment in Spain and Greece and pending elections in Italy the next round of events maybe political as well as economic. If Berlusconi wins the election and is supported by a Eurosceptic conservative party will he extract revenge over being bounced out of office by the EU commission by withdrawing Italy from the Euro?

    It will be interesting to see if Merkel can keep a lid on things until after the German elections in September or if events will catch up before then?

  • Pavlaki

    Thank you once again for the ‘real’ analysis of the European situation. I have infront of me a list of financial results from the Eurozone and from the UK and the UK ones are either good or reasonable, whilst those from the Eurozone are (with the exception of Germany) grim reading. When I log onto my forex site I read ‘Black clouds over Sterling’ and ‘Eurozone economies have turned the corner’ , ‘Future for the Euro looks bullish’ and Hollande saying that the Euro crisis is behind us. A quite amazing gap between reality and what people want to hear or believe!

  • Justathought

    Hi Shaun,

    Your blog intitule would have been …. When does Italy’s economy (and others western economies for that matters) will stop shrinking? I may have suggested not before 2015/2016. However after the latest declarations from French
    president François Hollande “While the crisis in the euro area is now largely behind us, we are far from having learned all the consequences. What threatens us is not the distrust of markets, but it is the people [’ distrust] …” Than I am afraid that I might reserve any foreseen date into a faraway future of 2020/2021.

  • http://fabadger.blogspot.com/ Dan Hill

    That’s what we’re all waiting for. Come October the leadership of France and Germany will be as fresh as it can get and only then will we see if there’s any political will to take the action necessary to turn the eurozone economies around.

  • ernie

    Does anyone know what poll ratings are being achieved by the 5-star party led by Beppe Grillo? As I understand it, he personally advocates leaving the euro (possibly also the EU) and his kind of “third party coming from nowhere” is exactly what I would expect to begin to happen as the eurozone countries’ internal politics crumble and fragment under economic stress.

  • forbin

    Hello Dan,

    I fear that a fresh German leadership will result in only a further giant leap to a full United States of Europe.

    If you’re happy with that , fine, but be careful of what type of U.S. of Europe you get – it will be frankly a Franco-German empire….

    The real threat is that of the UK electing a sepratist government – we have no chance of doing that either with all three Flags waving for US of E . They are bound too , money talks and big pigs need their greedy trotters in the trough.

    Until that happy day , we will get fudge after fudge , Italy isn’t going anywhere – any one who is against Europe is a “Nazi ” and anti-democratic !

    So I expect that “normal” markets are not going to appear anytime soon and , frankly , we are doomed for more “shrinkage” in our economies until final political union marriage – and you know what they say about marriage …… every man is incomplete until he’s married – then he’s FINISHED ! ;-)


    PS: Pop corn futures are up !

  • Justathought

    Hope I can post the result with this pic

  • ernie

    Thanks Justathought for what I assume (non-Italian speaking effort) shows 5-star in third place with 9%. They may improve but probably not much in such a short time. However, the vote looks very fragmented and they may cause a stir. Naturally they will be villified by the euro fanatics and treated like lepers, a la Nigel Farage and UKIP. Democracy is fast failing over most of the eurozone.

  • forbin

    Hello Shaun,

    As far as Mario Draghi goes perhaps we should nominate him and his profession for the Golgafrincham b ark

    Nominate a profession for the Golgafrincham b ark


    I certainly think our current crop of politicos deserve first class seats !!


  • forbin

    I think that ” Democracy” became a Mock-cracy after the Irish were ask to vote again after picking the “wrong” answer the first time !!


  • James

    I wonder what the effect of all this will be on Scotland and England. What if Scotland, as usual wanting to be rid of England, votes for independence plus EU membership. The referendum (if we ever get one) to stay or go from the EU would be England and Wales and I wouldn’t expect to stay in if that were the case.

  • James

    I would add that France and Holland voted against the constitution, but we got it through the back door anyway through amendments to the existing treaties.
    Add in the current position of Germany and the EU itself which is that it would be dangerous to have a referendum in the uk and the picture is almost complete.
    By the way, does anyone know if baroness Ashton is still the foreign minister of the EU and, if so, who elected her and what she is doing?

  • Anonymous

    However, the important bit is Germany. The rest don’t seem to count for anything in the ratings of the EZ, economically disastrous though quite a few of the countries are.

  • forbin

    hello James

    It would not surprise me one bit if “smarmy” alex salmond immediately put Scotland straight into the EU. I think that’s his game plan – big Euro gold plated job for him and stuff the Scottish people!

    From one union to another – and a swift fair well to any independence the Scots may actually believe they were getting…….

    Don’t get me wrong , if the Scots want independence they can have it with goodwill from me but I just think they will be betrayed by the very man touting that independence……


  • Anonymous

    Hi Rods
    The BBC was doing its best to boost things in the business component of News24 as it told us how good the Euro figures had been! Actually the composite #PMIs showed shrinkage and the retail sales numbers were very weak….
    As for Italy the stock market recovered by 1% today but the bond market barely moved so we await the next move in this game of chess.

  • Anonymous

    Hi pavlaki

    You might want to read my reply to Rods about how the BBC presented today’s Euro area data on News 24 as good. Whereas the UK services #PMI showed growth at 51.5!
    The currency situation is getting more bizarre because if you punish the £ for weak economic performance how does the Euro rise? I do not think it can be a shadow Deutschemark for 2013 as a whole because I expect things elsewhere in the Euro area for example Italy to get worse.

  • Anonymous

    I guess Jim Hackers “Never believe anything until it is officially denied” applies here!

  • http://fabadger.blogspot.com/ Dan Hill

    Hello Forbin,

    The options don’t look great in either direction. The EU project is a mess. If it was ever serious about integration and a United States of Europe, the continent’s finest linguists would have devised a European language and there would be school leavers fluent in it by now.

    But this negative bearing stasis that Europe is in will not do. Action has to be taken for either break-up and reset or full on union. Come October European (read Franco-German) leadership will be as decisive as it’ll get. If it doesn’t lead the way clearly to political union at that time then break up will be forced upon it.

    Either way, at least something would happen rather than this can-kicking, burying heads in the sand nonsense that has been going on the past 3 years.

  • Anonymous

    Hi Forbin
    Thanks for the reminder of the work of Douglas Adams. One bit that comes to mind is the Cow in the Restaurant at the End of the Universe who recommends itself “the rump is good” etc. That is now I guess a bit out of date as it would have to point at a nearby horse!

  • Anonymous

    I disagree. I do not see how this article in any way proves the thesis postulated in the headline. A) The article contains no evidence of austerity, B) Clearly, the author doesn’t think that composition of austerity matters in terms of growth impacts (strange enough worldview), C) The article fails to relate the impact of borrowing costs (function of NOT carrying out proper ‘austerity’) on economy with a massive debt/GDP ratio. D) Postulating that ‘austerity is killing Italy’ is useless in so far is it offers no comparative to the ‘first-best’ of ‘no austerity’.