The last ten days or so have seen a lot of debate about the role of one of Italy’s most prominent individual, the President of the European Central Bank Mario Draghi. Will he save the Euro? Can he save the Euro? And so on and in some cases on and on. However whilst the ECB can help in the financial arena in terms of liquidity and interest rates in an era of broken monetary transmission mechanisms we have to face the fact that even extreme measures may only have a limited impact on the real economy.
I wish today to examine what Mario might be able to do for his home country Italy.
Italy’s economic situation
I was struck last week by Italy’s unemployment numbers which I would like to look at in more detail now.
Istat estimates that 23.0 million persons were employed in June 2012 (provisional data). Employment rate was 56.9%, unemployment rate 10.8% and inactivity rate 36.1%.
These numbers were immediately troubling because they showed an unemployment rate some 0.7% higher than the month before. This was hidden in the announcement of a 0.3% rise (76,000) because there was a revision higher to May’s numbers of 0.4%. The 761,000 Italians who had joined the unemployment line will be much less concerned with such technicalities.
The other concern was the size of the inactivity rate at 36.1% which is rather high. For example here are the latest numbers for the UK.
The inactivity rate for those aged from 16 to 64 was 22.9 per cent
And if we look back over the last 12 months we see that levels of inactivity in Italy have dropped (752,000) by a very similar amount to the rise in unemployment (761,000). This may be a statistical fluke but it tends to raise the amount of unease about the numbers.
Italian industrial production
We can come right up to date with these numbers and we see that on a month on month basis the decline is continuing.
In June 2012 the industrial production index seasonally adjusted decreased by 1.4% compared with the previous month.
And that the comparison with last year looks grim.
The unadjusted index of industrial production decreased by 8.2% compared with June 2011
Over 2012 as a whole up to June the year on year decline is 7% so the situation still appears to be weakening. And if we look back over time for some perspective we see that the industrial production index is unadjusted at 87 or seasonally adjusted at 82 compared to a base of 100 in 2005. Looking at the detail the turn downwards appears to have started in August 2011 and it is widespread as all sub- categories have weakened since that date.
Rather disturbingly if we look back in time we see that such numbers for Italian industrial production were last seen in the late 1980s.
Gross Domestic Product
The Italian statistics office has informed us of this this morning.
In the second quarter of 2012 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.7 per cent with respect to the first quarter of 2012 and by 2.5 per cent in comparison with the second quarter of 2011.
Looking into the back data gives a similar pattern to the industrial production figures I discussed above where a downturn took place in the late summer of 2011 which is worsening rather than recovering. At this point the downturn is still weaker than the first quarter of 2009 when Italian GDP was falling at an annual rate of 6.9% but it is gathering pace. And if we go back to the beginning of the credit crunch era Italian GDP was 374 billion Euros in the first quarter of 2008 but was only 349 billion Euros in the second quarter of 2012.
So Italy has had negative GDP growth for four quarters in a row (-0.2%, -0.7%,-0.8% and now -0.7%) and is shrinking at an annual rate of 2.5%. This is faster than assumed and forecast by the Italian government (-1.2%) and indeed the Italian economy has already shrunk by more than that forecast which was supposed to be for the whole year.
If we recall Italy’s past economic history we are reminded that her essential problem in the pre credit crunch era was a lack of economic growth. So any further declines will mean that she will be in “lost decade” territory. In fact it is probably better to debate how long such a thing will last. On numbers based in 2000 Italy had a GDP of 1.191 trillion Euros in 2000 and 1.221 in 2010 and we may be soon facing the prospect of annual numbers from the last century being repeated.
The fundamental issue here for Italy is the size of her national debt relative to her economy. This is not a new issue as at the beginning of the last decade she had a ratio of 108% (national debt to GDP ratio) but it is getting worse and was 123.3% at the end of the first quarter of 2012. In many ways she has done well to survive with such numbers but it looks as though it is beginning to slip away from her. A shrinking economy hits the numbers in so many ways. We will see a reduced GDP combined with increased benefits spending and lower tax revenue. Applying austerity as Mr.Monti’s government plans will reduce GDP more quickly than it improves the public sector finances if Greece is any guide.
Another sign of problems here was a video report I saw on Bloomberg news which showed empty marinas. The Italian authorities attempt to crack down on tax evasion appears to have led to the individuals concerned simply sailing elsewhere. And in something that makes you want to bang your head against a wall some have apparently sailed to Greece!
We see from the latest data that Italy is on something of a downwards spiral right now. But if we return to Mario Draghi I find it hard to see how he can help much. The ECB has already deployed most of its resources. For example its main interest-rate has been reduced to 0.75% and its deposit rate is now zero. As 2011 moved into 2012 it issued over a trillion Euros of three-year liquidity in an attempt to smooth over bank funding problems.
I see some arguing that it could move into full scale Quantitative Easing but the evidence of countries which have tried QE is that it simply has not worked.So we see a central bank which in many ways has now moved to the margins. It could buy Italy’s debt in an attempt to reduce the costs of it as at 6% the cost of ten-year debt is still very high. But if we look at the underlying Italian economy this would have a very marginal impact. Indeed the lesson of the UK seems to be that reducing such bond yields to very low levels (1.52%) does not seem to be helping the real economy much if at all.
So we return to the fundamental problem of the Euro area’s response to the crisis which is that central bank tactics have replaced any sort of coherent strategy. And in spite of vast sums of money being employed the situation has got worse. So how can one think that using even more will do any better?
Italy’s house prices
This issue was raised recently in the comments section so let us discuss whether there has been any sort of boom and bust. Pre credit crunch house prices rose as the index compiled by the ECB (2007=100) rose from 62.7 in 2000 to 102.62 in 2008 on an annual basis. But since then there has been little sign of any bust as the number for 2011 was 103. It is somewhat behind the times as it is calculated on a half-year basis but using the second half of 2011 gives an index value of 103.
These have been very enjoyable and not only because the UK has done well. However I wonder about the hyperbole involved in promising that it will give a boost to the UK economy as this would reverse the trend of recent Olympics. Surely if there was a boost we would have had it by now (stadium and infrastructure construction…) which is slightly ominous they way we are going.
Also the UK’s relative success has been driven by lottery money. If you think about it this is a type of taxation and it is also regressive as the poor are more likely to support it,yet it never seems to get questioned…This article was written by Shaun Richards and originally published on Mindful Money under the title: Italy is on a downwards spiral which will prove hard to reverse
Tags: banking , central banks , economic recovery , EU , euro , Euro zone Crisis , European Central Bank , European Monetary Union , eurozone , financial crisis , General Economics , Greece , interest rates , Italy , Quantitative Easing and Extraordinary Monetary Measures , sovereign debt , Spain , Yield