Shadows Loom Over Italy’s Growing Trade Surplus

Once again, Italy’s balance of trade shows a growing surplus with the rest of the world.

In July, Italy posted a trade surplus of €6.9 billion, up from €6.0 billion in July 2013, according to Istat’s official data.

Yet the economic headlines from the euro-zone’s third-largest economy remain bleak, and now both the IMF and the OECD project Italy’s gross domestic product will contract for the third consecutive year in 2014.

Too often Italy’s media and politicians exult in the trade surplus as if it were proof that local manufacturers and their ‘made in Italy’ wares are a rocksolid foundation. Unfortunately, the data suggest that termites remain on the job and are undermining Italy’s industrial fabric.

Despite the growing surplus, Italy’s exports fell 1.6% from June. What propped up the surplus was the bigger 2.5% fall in imports.

When translated into national accounts to compute GDP, that means that “net trade” is contributing to growth. In other words, the domestic economy is doing even more poorly than the official GDP figure suggests, which explains why jobs are being lost. Hours worked in industry and market services fell by 0.4% in the second quarter from the first three months of the year, twice the drop of overall GDP. Entrepreneurs, not employees, are being hit with the lost hours.

But most concerning of all is that the July trade figures showed a 3.5% drop in imported capital goods, the kind of things that factories need to carry out production tomorrow. Imports of intermediate goods fell 3.4%, suggesting that exports are mostly coming out of inventories.

The day will hopefully come when Italian companies start importing again. That will be a positive development, meaning they are gearing up for more production or at least improving their physical capital stock. When that happens, ignore the headlines about Italy’s shrinking trade surplus.