The Wilder View

The Italian Economy Is Sliding

Today I.Stat released the breakdown of Q1 2012 real GDP for the Italian economy. Weak external demand plus a precipitous drop in private sector spending dragged the headline real gross domestic product (GDP) 0.8% over the quarter (3.2% at an annualized rate). The highlights are the following:

  • Gross fixed capital formation (investment net of inventory formation) fell 3.6% over the quarter, or 13.7% at an annualized rate. This was the fastest quarterly rate of decline since Q1 2009 when GFCF fell 5% over the quarter.
  • Private consumption dropped 1.0% over the quarter, or 3.9% at an annualized rate
  • Imports fell 3.6%, or 13.6% at an annualized rate
  • Exports fell 0.6%, or 2.2% at an annualized rate
  • The only positive contribution to domestic spending was government consumption, which increased 0.4% over the quarter, or 1.4% at an annualized rate.

Italy’s real GDP is only 1.1% higher than its lowest point during the recession (Q2 2009). Furthermore, gross fixed capital formation has dropped at an increasing rate for four consecutive quarters. Hope for stabilization eludes, as the current business confidence survey continues its decent – IStat manufacturing confidence was 86.2 in May, which was the second lowest level since the outset of the EMU and well below the 100 average since 2000. Broadly speaking, the economy is imploding.

Don’t pin your hopes on exports. The contribution of exports to real GDP growth has dropped for two consecutive quarters, bucking a trend of positive contribution since the middle of 2009. The only reason that the net export contribution was positive in Q1 was due to the +1% contribution coming from a sharp decline in imports. This cannot be sustained, as the crisis of confidence has begun.

(Note: In the chart below, if real import growth is positive, then the contribution is negative; and if the real import growth is negative, then the contribution is positive.)

This is a product of failed policy at the Euro area level, and something needs to be done to break the positive feedback loop.

Rebecca Wilder

10 Responses to “The Italian Economy Is Sliding”

bubblesandbustsJune 11th, 2012 at 8:56 pm

Given that government consumption was the one positive aspect of GDP in this quarter, claims of austerity appear out of place. One might argue that the government should be doing more, but it's clearly still adding to aggregate demand.

DiranMJune 12th, 2012 at 6:35 am

A large underground economy is a symptom of an oppressive and malfunctioning state that is very hostile to business and the private sector.

A1AJune 13th, 2012 at 2:30 am

….or the lack of cohesion in the populous i.e. rentiers and serfs in separate economies for too long.

DiranMJune 12th, 2012 at 6:34 am

In Euroland, the policy makers see expanded government and EU transfer money as the key drivers in development. They are not private sector minded (except in the sense of crony corporatism) and generally hostile to direct foreign investment.

This is related structually to the political system since EU transfer money and cheap credit is the principle means of European political parties for political patronage to remain in power. A stronger private sector means more independent voters. A greater representation of productive classes means less room for career politicians.

In Europe generally there is a firewall that blocks anyone from the private sector to enter into politics. The entire EU political leadership are career politicians, who have lived off government money all their lives. They have never ever created any value, but they have proved great value destroyers.

Patrick_VBJune 12th, 2012 at 11:44 am

Hi Rebecca,
It should be remembered that Italy's government was producing primary budget surpluses in the years preceding the crisis of 2008 and that the current deficits are indeed mainly due to contra-cyclical automatic spending and the contraction of tax revenue due to declining incomes. Private consumption accounts for about 60% of Italian GDP, exports for about 29% of GDP. So, it would be much easier to raise GDP by increasing domestic demand than by relying on exports. These latter go mainly to other EU countries, hence it cannot be expected that Italian export growth will be particularly robust over the coming quarters (or even years). As for imports, a positive contribution to GDP growth from a decline in real imports is just an indication of an unsustainable collapse in final demand. It really really should not be viewed as positive news… Unless it is the result of a policy of massive structural import substitution… This is not the case in Italy. Of course, there is then the fundamental concern of Italy's potential output growth, which has been falling steadily towards nil over the last decade. This is now the real issue: how can Italy pay down its debt if its economy no longer has positive trend growth? This is surely why investors are now charging a considerable risk premium for holding Italian public debt, and this produces a negative feedback loop because these higher financing rates are incomaptible with decling debt/GDP ratios. Remember, the rule of thumb for debt sustainability is that the nominal GDP growth rate is higher than the interest rate on debt. If Italy's real GDP growth rate comes out around 0% over the next years and if (GDP) inflation is around 2%, a sustainable borrowing rate for Italy should be no higher than 0%+2% = 2%. However, current rates on 10-year bonds are now around 6.5%…

Helmut KirchnerJune 15th, 2012 at 6:08 am

Hi Rebecca,
From Italy. One of the reason of import reduction is the collapse of the car market. More than 30% in two years. Car are 70% imported.
I do not see government spending as a good factor since in Italy is mostly is dissipated.

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