Italy’s Lead Feet

On this page we present the salient features of the Italian Economy since the onset of the Great Recession in a global perspective, where the comparison is with the EU28 and the United States.

The first figures below show the path of Real GDP and its components since the recession. We have indexed all variables to the first quarter of 2008.

GDP and Main Aggregates

As with several the Netherlands, France, and Spain, Italy was hit with an after-shock just at the start of its recovery from the Great Recession. While the contraction resulting from the after-shock was not as severe as that from the Great Recession, it has resulted in a more persistent, ongoing struggle for the Italians. Even now, 10 years later, the Italian economy has not recovered to pre-crisis levels. In fact, it was not until 2016Q3 that Italian GDP recovered to levels seen during the worst of the Great Recession.

The figure above shows the year-on-year growth rate for the U.K. economy. That is the growth for 2010Q1 should be read as the Real GDP growth rate between 2009Q1 and 2010Q1. We rely on these numbers rather than annualized quarterly growth rates as we believe they paint a more reliable picture of long-run trends. The good news is that Italian growth has been increasing since 2013Q1. The bad news is that it has remained well below that in both the U.S. and the rest of the EU.

 

Household consumption is qualitatively similar. In fact, Italian households were doing no worse than those in the U.S. relative to pre-crisis levels, however the after-shock squashed any hope of a quick recovery.

A promising sign for Italy, however, lies in its increases in fixed investments. While it remains true that Italian fixed capital formation greatly lags the rest of the West, it has increased this measure at a rate similar to the EU28 and the U.S. over the past several years.

 

Italian trade as lagged behind the rest of the West as well. Indeed, exports declined by just under 25% immediately following the Great Recession.

The level difference between Italian and Western exports as a whole is almost entirely a by-product of this initial drop. The figure below shows that, except for a 3.5 year period, Italian and EU28 exports grew at the same rate.

The picture for Italian imports is similar, though they faced a more pronounced divergence from the EU28 during the after-shock.

The Labor Market

The Italian labor market was hit quite hard by both the Great Recession and after-shock. Indeed, Italy entered the Recession with an unemployment rate of 6.5% that reached a peak of almost 13% in 2014Q1.

Moreover, the employment to working age population ratio and labor force participation rate in Italy appears to have followed a trend parallel to that of the EU28, but with a size-able level shift downward. This suggests to us the presence of structural barriers inhibiting a more active population. Here, we use the labor force participation rate for individuals 20-64 years of age.

 

The Role of Government

Italy entered the Great Recession (and joined the Eurozone) with a very large stock of outstanding debt. Their desire to keep their primary deficit under control gave them trouble when it came to the Government’s response to the Great Recession, a position that was exacerbated by political instability.  The figure below shows the response as measured by the debt-to-GDP ratio.

During its recovery, Italian debt increased twice: once in response to the Great Recession and again in response to the after shock. Currently, the debt-to-GDP ratio is over 130%. For comparison, the debt-to-GDP ratio for the U.S. was 103.8% in 2017Q3.

Moreover, the Italians did not adjust their government consumption much until the then Prime Minister agreed to allowed IMF oversight of austerity programs in the country.

Italy’s struggles in getting a handle on its size-able debt will likely continue given its high interest payments and sluggish recovery.

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