The zero growth figures

The European slowdown has brought Italy to a standstill due to structural weakness and the instability produced by the government’s dispute with the EU Commission

The economy often comes to a head in the summer. That was the story in 2011, when Europe suffered its sovereign debt crisis and also in 1971, on 15 August, when Nixon announced the end of the international convertibility of the United States dollar to gold. And it happened to a lesser extent last year as well. All Italian economic indicators started to veer into the red between June and September 2018. Just as the “government of change”, the first European government in Europe in the hands of a nationalist-populist force, moved its first steps. Was it just bad luck or was there blame involved?

The first problems for the “Italy first” government came from outside. The entire euro zone in the second half of the year started to creak, with industrial production dropping by 0.5%, mainly owing to problems in Germany: between June and December German industrial production fell away by 2.2% and Italy followed suit: from the middle of the year industrial turnover started to drop until the shock collapse of 7.4% in December. A repercussions of the international value chain, with Italy’s industrial compartment strongly linked to Germany’s, compounded by the European diesel car crisis. But even the China-US trade war was partly to blame. For a country like ours, where growth relies on exports, the slowing of world trade was already very bad news. When allied with a nationalist ideology, it bears within it an obvious paradox: the only hope for our local sovereigntists is the failure of sovereigntists abroad. Or forms of cooperation between nationalists – an obvious contradiction in terms.

If the first shock came from abroad, one certainly can’t pin the great freeze entirely on international economic circumstances. If we break down the figures for industrial turnover, we see that the heavy drop in December 2018 was equally spread over national and foreign sales; and that from January onwards the foreign component started growing again while internal growth kept dropping off. The same can be said for the orders that Italy’s industry had in its portfolios: after dropping by 4.7% in December, mainly due to the drop of orders from abroad, they then fell by 1.2%, this time due to a drop in national demand. Since the middle of the year, even private investments have slowed. In short: Europe’s snuffles resulted in a bout of pneumonia in Italy. This is partly due to our economy’s structural weaknesses; and in part due to a factor that is crucial for markets: expectations.

The expectations surrounding the government’s budget started to come to a head way before the budget was actually drafted: when, before announcing the ‘expansive’ measures, the gauntlet was thrown down before the European Commission, regarding excessive budget spending. This led to a storm that lasted two months and ended in compromise, but left a number of victims on the ground, mainly on the Italian side. The yield differential between Italian and German treasury bonds (the spread), which during the first four months of 2018 had stood at around 120 base points, climbed to around 230 in May, and peaked at 320 in November. In March 2019, when the emergency seemed to be over, it was hovering between 230 and 260 base points: over double compared to the same month of the previous year. This means that the interest rate on Italy’s debt has gone up by one percentage point. The effect on the government’s interest rate payments is disruptive: it has grown by 0.9% in a year, while in 2017 it had dropped by 1.2%. This figure, besides damaging the public accounts (the total debt in 2018 climbed to 132.1% of GDP), also has repercussions on the private economy, making credit conditions worse for companies and families and putting banks at risk.

But beside the spread-effect, could it be that the moneys funnelled into the economy by the 2019 budget not do much for manufacturing and consumption? After all, it is still 2% of GDP, which has been allocated to meet three objectives: blocking a VAT increase, allowing a drop in retirement age (so called “quota 100”) and bringing the citizen’s income into being. The compromise reached with Europe put paid to the potentially expansive part of the budget, meaning public investments, by wiping off 1.8 billion from this particular budget heading.

Even the government has posted what can hardly be considered a positive assessment of the impact of its budget on growth: 0.4% GDP points. The Parliamentary budget office is more pessimistic: 0.3% of GDP points, due to the citizen’s income (which accounts for 0.2% of GDP) and the neutralisation of the VAT safeguard clauses. This latter measure has a positive effect of 0.1% of GDP – but it’s worth recalling that as early as next September the government will have to decide what cash it will use in order not to raise VAT in 2020 and 2021. While the impact of the remaining parts of the budget is zero. Therefore in its first year of life the government has waged all its resources on an “expansive” budget which, if all bodes well, will only increase GDP by half a percentage point; as the country enters recession and growth forecasts are being lowered by everyone (the EU Commission now estimates a growth of 0.2%, the Bank of Italy 0.4%, while according to the OECD we’ll witness a drop of 0.2%). The Italian government has in fact now lowered its growth forecast from 1% to 0.2% of GDP in its DEF (Economic Planning Document) published at the beginning of April.

If the economic budget has had a fairly negligible effect on growth, what about on employment? In the absence of economic growth and a possible recessions approaching, it’s hard to see how companies will be hiring enough to completely replace the additional retirees who will have benefitted from the early retirement opportunities offered by “quota 100”, while employment in the public sector is blocked by its internal stability agreements. As for the citizen’s income, advertised on buses as a “revolution in labour relations“, it is more likely to have an impact on the social security system rather than on labour markets– it’s hard to imagine how the Job Centres in just a few months, with a few thousand extra staff, can suddenly become effective job placement terminals.

In actual fact the government measure that so far has had an impact on the job market is the so called “dignity decree”, which in July introduced substantial disincentives on temporary employment. The figures published by INPS (the Italian Social Security Agency) for the last part of the year saw the 5SM claiming victory owing to a growth in permanent employment contracts: over the whole of 2018, while jobs overall have increased by 5.1%, within that number those pertaining to permanent contracts have increased by 7.9%, more than temporary job contracts (+4.5%). If we once again look at a breakdown of these figures, one sees that the real boom lies in so called “transformations”, meaning temporary contracts now transformed into permanent ones: these have posted a + 76.2%. One can well imagine what’s gone on: many companies, as the temporary contracts that could no longer be renewed lapsed, transformed them into more permanent ones. Good news of course, but not the creation of ‘more’ jobs. After all, the “activations” meaning the start of new employment relationships, have actually slowed over the same period.

If we step back to look at more medium term trends, especially where employment figures are concerned, we see that temporary employment has been growing constantly for the last ten quarters: in 2018 temporary employment reached its historic peak, with 3.1 million temporary contracts. Even Renzi’s imposing budget, with incentives for permanent employment contracts, did not reverse the trend, after an initial thrust. The reason for this is linked to both the demands of the economy and the actual manufacturing structure, which is increasingly focused on services, which feature more flexible and insecure working relations in areas such as sales, tourism and logistics. Much as was the case with Renzi’s tax relief incentives, even the effects of the dignity decree can only be fully assessed in the long term. And the figures for February have already shown a drop in permanent occupation: could it be that the Di Maio effect is already wearing off?

@robertacarlini

This article is also published in the May/June issue of eastwest.

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