Italy
4th quarter 2013
Italy Turning point The pace of contraction of the GDP has further diminished in the second quarter, paving the way for some positive readings starting next quarter. The rebound in exports and better expectations make the end of recession closer. However, future sprouts of economic recovery need to be shielded from downside risks, which mostly depend on the domestic political scenario. The high cost that renewed political turbulence would exert on the public debt burden should help government stability in the short run. Full-fledged recovery will require more, starting from growth-enhancing structural reform of taxation.
■ A milder recession
1-Italy, Real GDP
The Italian economy continued to contract in the second quarter of the year, despite at a slower pace. Real GDP fell by 0.3% q/q, after -0.6 in Q1 and -0.9% in Q4 2012. Since the beginning of the crisis the Italian economy has recorded a cumulative loss of almost 9 percentage points. In Q2, domestic demand further declined, subtracting 0.3 pp from GDP growth. The inventory change cut the growth rate by an additional 0.4 pp. Exports rebounded (+1.2%), recovering after the 2.1% contraction of the previous quarter, while imports recorded the tenth decline in a row: and net exports added 0.4 pp to the GDP growth.
Contributions to quarterly growth ▐Final domestic demand 2
▌Net exports
▌ Inventory change
1 1 0 -1 -1 -2
Assuming no further growth in the second part of the year, the annual GDP growth would stand at is -1.8%. According to surveys, the Italian economy is likely to come back growing in Q3, and even if the recovery is to remain moderate, the 2013 contraction will likely be limited to 1.7%, while we expect 0.5% growth in 2014. Risks surrounding this scenario are on the downside. For instance, the July production posted a 1.1% monthly decline. On the seven months to July, industrial activity fell by 4%.
-2 -3 2008
2009
2010
2011
2012
2013
Source : Istat
■ Better investment conditions
In Q2, the decline in gross fixed investment slowed, down 0.3% versus -2.9% in Q1, benefiting from a significant rebound in transportation expenditure (+4%). Investment in construction continued to contract, down by almost 30% versus the pre-crisis peak, as well as spending on machinery and equipment. Spending on capital goods is expected to stabilise in H2. Italian firms are taking advantage from the payment of outstanding trade debts by general government, with EUR 7bn already paid back and other EUR 20 bn to be reimbursed by the end of the year. Besides, and according to the Bank of Italy survey, the investment environment has slightly improved. Gross fixed investment should recover only gradually, as Italian firms’ operating profitability remains low.
■ Private consumption lags behind
The recession continues to be shaped by the decline of household’s expenditure. In Q2, private consumption fell by 0.4% q/q, broadly the same pace as in Q1, down for the tenth quarter in a row. Since the beginning of 2011, consumption has lost almost 7.5%, i.e. a more marked downturn than the overall economy. Italian households significantly reduced their expenditure in durable and semi-durable goods, respectively -20% and -17%. The milder decline in the service sector, is however gaining momentum.
■ Weak credit
This mainly reflects the worsening of labour market conditions. Since the beginning of the crisis, employment declined by 1.1 million, of which almost 600,000 in 2012 alone. The purchasing power fell by more than 10% compared to late 2007. In Q1 2013, disposable income slightly recovered in real terms, benefiting from a milder inflation. But Italian used this to save more rather than to spend more: the saving ratio increased from 7.7% in Q2 2012 to 9.3% in Q1 2013, to cope with the persisting uncertainty over future financial conditions.
In July, lending to non-financial corporations contracted by 4.4% y/y versus -3.7% in the eurozone, marking the fifteenth consecutive fall since May 2012. Reduction of credit reflects, with some lag, the prolonged economic recession which weakens the demand for loans. The credit contraction appears to be less intense for small businesses as lending to these firms was down by 3.1%. Signs of stabilisation emerge on interest rates with the average cost of new loans to Italian firms remaining at 3.5%.
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Italy
■ Spreads and politics
4th quarter 2013
3- Shadow economy
According to sensitivity exercises run by the Italian Treasury and published in the current Italy’s Stability Programme, an instantaneous, permanent upward shift of one percentage point on the yields on government securities would translate into an additional debt burden equal to 0.15 pts of GDP in the first year, 0.33 pts of GDP in the second year and 0.46 pts in third year. This means that, as the Italian GDP amounts to nearly EUR 1,6000 bn, the cost of heightened political uncertainty connected to Mr. Berlusconi’s political future following his conviction for tax fraud may be substantial, even in the short run. Yields on Italy’s 10-year sovereign debt already overtook Spain’s borrowing costs on September 10 th for the first time since March 2012.
As a % of GDP (2012) 25 20 15 10 5 0
Further rise of the spread of Italian BTP over 10-year German bonds may dampen the chance that Italy ability can fulfill its Fiscal Compact’s obligations - starting with the 3% threshold of the public deficit to GDP ratio - thus wasting all the improvements realised through the past year and the sacrifices borne by the Italian tax-payers. Additional financial costs would also threaten the possibility for economic recovery to take roots. Increasing awareness about the major damage of renewed uncertainty may play a stabilising effect by preventing political parties from embarking into a crisis which would prove very difficult to explain to the electorate in the case for an anticipated vote. Nevertheless, alternative political scenarios cannot be ruled out with downside risks in terms of economic perspectives.
France Germany
UE27
Euro Area Spain
Italy
Source : European Commission
growth-friendly structural reforms are needed to restore competitiveness and to enhance job creation in the long run. As stated by the European Commission (in the European Semester’s Recommendations to the Italian government), measures are to be taken to fight tax evasion – in Italy, the shadow economy accounts for 22% of GDP - reduce the scope of tax exemptions, simplify the tax code and, most importantly, shift the tax burden away from capital and labor to property and consumption.
■ Turning point
All in all, Italy is at an economic as well as political turning point. Political stability looks as a necessary condition for the economic recovery to progress. But it does not suffice, as
Giovanni Ajassa
[email protected]
Paolo Ciocca
[email protected]
Summary y /y , v ol, %
2- Weak credit Loans to non-financial corporations, y/y, % ▬ Eurozone
— France
— Italy
14 12 10 8 6 4 2 0 -2 -4 -6
2012 2013 e
2014 e
GDP
-2.4
-1.7
Priv ate Consumption
-4.3
-2.4
0.5 0.2
Public Spending
-2.9
-0.3
-0.4
Fix ed Inv estment
-8.0
-4.9
2.1
Net ex ports (contribution)
2.8
0.9
0.3
2012 2013 e
2014 e
Inflation & Labour y /y , % Consumer Prices
3.3
1.3
Consumer Prices (ex . F & E)
2.0
1.1
1.4
10.7
12.1
12.6
2012 2013 e
2014 e
Unemploy ment Rate, %
1.5
External & public accounts % GDP
2008
2009
2010
2011
2012
2013
Current account
-0.5
0.7
0.8
General Gov ernment Budget
-3.0
-3.0
-2.5
Debt ratio
127
133
133
e : BNP Paribas Estimates & Forecasts; vol: volumes
Source : Eurosystem
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