Italy’s No-Growth Update

OK I’m on a roll, so I’m going to stick my neck out. This slide in the Italian confidence index apparently surprised the ‘experts’. Well it shouldn’t have surprised Fistful readers who have been following what I have been saying. Clearly these confidence indexes are not the last word in sliced bread. But they do mean something, and Germany’s Ifo index just turned in another bad reading too.

Ever since Parmalat, I have been asking one simple question: will Italy ever grow again? Of course, the simple answer is possibly it will: never say never. But will it ever get back to vigorous growth: this I doubt. I am even half asking myself if we will see positive numbers in more than say 50% of the forthcoming quaters. Remember, if my demographic thesis has any predictive power it should be precisely here in Italy that the Titanic starts to take in water. Parmalat was simply the iceberg. Of course my thesis could always be wrong. Any takers?

Manufacturers’ confidence in Italy suffered a larger-than-expected fall in February, in the latest sign that the economic recovery in Italy and the eurozone as a whole may not be as robust as once hoped.

In a survey released on Wednesday, the Italian research institute ISAE said its seasonally adjusted index of manufacturers’ confidence had fallen to 92.6 from a revised 93.5 in January. Financial markets had expected a much smaller decline.

On Tuesday, ISAE reported that its core index of Italian consumer confidence had fallen to 99 in February from 100.6 in January. Consumer confidence is at its lowest levels since the index began in 1996.

The data follow preliminary official estimates of economic growth, according to which the Italian economy ground to a halt in the fourth quarter of 2003 after a brief return to growth in the third quarter. Growth in the whole of 2003 was estimated at 0.4 per cent, the same as in 2002 and slightly below the Italian treasury’s expectations of 0.5 per cent.

The latest Italian figures were published one day after the German Ifo institute reported a surprise fall in its closely watched business confidence index, which dropped to 96.4 in February from 97.5 in January. It was the first fall in 10 months.

In a statement, ISAE said the fall in Italian manufacturing confidence had been caused by the stockpiling of finished products, which had returned to a higher level than normal.

Independent economists said the weak Italian data also reflected recent industrial unrest, the financial scandals at the Parmalat and Cirio food groups, and the euro’s strength on foreign exchange markets, which is affecting Italian exporters’ ability to sell products in the US in particular.

Fear of unemployment, and a perception that inflation is higher than official figures suggest, are other factors behind the low confidence of Italian consumers.
Source: Financial Times

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

22 thoughts on “Italy’s No-Growth Update

  1. Edward,
    be careful mixing business events with demographic trend readings. Palarmat has almost nothing to do with this:
    will Italy ever grow again? Of course, the simple answer is possibly it will: never say never. But will it ever get back to vigorous growth: this I doubt.

    Economics is tied to demographics, of course.

    But consider that rich societies tend to follow a K-selected reproductive strategy while poor ones follow an r-selected strategy.

    To expect r-selected attributes from a society that’s so obviously following a K-selected strategy is silly.

  2. “be careful mixing business events with demographic trend readings.Palarmat has almost nothing to do with this:”

    I am being careful Patrick, very careful. I’m just looking for the trip switch that’s all. Something that is going to set all this off.

    Keynes said that economics in the end had something to do with “animal spirits”. Well a lot of good, hard working Italians just had the stuffing knocked out of them. I think it would be hard to overstate this.

    The thing you need to appreciate is that many of these societies, simply because the workforce will decline, are going to have negative growth as far away towards the horizon as the eye can see.

    The only solution to the problem was to increase the Multi Factor Productivity by leveraging all our extra education: but what is happening in India and elsewhere just changed all that, didn’t it.

    We’re just living in denial that’s all. Nothing strange about that. We’ll get used to it eventually.

    I’m just setting myself the hurdle of Italy as my own personal kind of Rorschach Test: let’s see if I’m reading it coherently.

  3. Edward,
    If we accept that GDP-growth/decline is tied to population-growth/decline. A decline in the population could lead to a decline in the GDP without substancially affecting the per-capita ratio.

    India’s per-capita is roughly a magnitude lower than Italy’s.

    So either 90% of Italy’s economy would have to fail in order for its per-capita ratio to fall to India’s level. In other words, much much more than Palarmat.

    Or, India would have to grow its economy 1000% (or something somewhere in between the two scenarios). 1000% growth is certainly possible over time, but it would have to be 1000% after the population growth rate was factored out…that’s harder.

    That said, that sort of economic activity would likely trigger a switch from a r-selected reproductive strategy to a K-selected strategy.

    The more economically successful India becomes, the more likely it’s population will slow its growth rate.

    I think it’s more likely that India will one day match Italy’s economic development than Italy will regress to India’s level.

  4. The implicit (and rather obvious) distinction between the two population arguments is that the working age proportion of the population is declining and adversely affecting per capita GDP.

    The example of India is not meant to claim that the two will converge anytime soon, but that many Indians are as well educated as the average Italian (the average Indian doesn’t even come close, but there’s an awful lot of people in India).

    In a static analysis, I’d say that Italy would probably decline faster than India will grow: a decline of 50% in the larger can happen much more quickly than the equivalent growth of 100% in the smaller (equivalent in terms of adjusting the ratio between the two). Look to Argentina for an example of a precipitous decline.

    However, what is far more likely is that the situation will not remain static: like it or not, the core problem of “working age” will have to adjust. The money runs out eventually, and the pensioners can either starve to death or find something productive to do. Something will have to give.

    The example of Argentina is not all that far off: traditionally, Italy would simply run up its debts until it experienced a currency crisis. The euro should prevent the crisis, although the Stability and Growth Pact will not prevent the debts. Something else will have to give. It will be interesting to find out, if no other solution is found before then (which is the likeliest case). I would estimate that any drastic action can be put off for at least a decade.

    P.S.: My bet would be that the more solvent countries start to leave the euro as the less solvent countries start to erode the currency.

  5. In a static analysis, I’d say that Italy would probably decline faster than India will grow: a decline of 50% in the larger can happen much more quickly than the equivalent growth of 100% in the smaller (equivalent in terms of adjusting the ratio between the two)

    To simplify the numbers I found slightly:
    Say Italy’s Per-capita GDP is 24 000,
    and India’s ratio is 2 600.
    a 50% reduction in Italy’s per capita would leave it at 12 000.
    a 100% increase in India’s per capita would put it at 5 200.

    To a point, I agree that Italy could potentially decline faster than India could grow. But I don’t see the trigger for such a decline coming from the financial collapse of a large dairy operator.

    A plague or war, maybe. But such triggers would likely also trigger a switch in reproductive strategy: screw today for you may die tomorrow.

    Likewise, a key component for continued per-capita growth for India would likely require transitioning its population to a K-selected strategy.

  6. Italy is more likely in a vicious cycle: as they get poorer, they feel less able to afford children. The longer term adjustments you are referring to are indeed much longer term: about a decade for a new societal impetus to spread (and there’s not much sign of it having started yet), and then another 20 years before the children become productive. A solution 30 years from now will be too late. A more likely means of skewing the distribution is through immigration or a guest worker program.

    The Argentinians did not require a war, nor did the U.S. in the 1930s. Chavez is having a grand time utterly gutting his country without too much domestic bloodshed, although that level of civil strife may provide your trigger: I don’t know just how bad life on the streets is these days for them.

    I wouldn’t completely write off the Parmalat connection, although I agree that it is almost certainly not directly related. As Edward said, he was looking at it as the trigger of impending catastrophe, not as a part of the catastrophe that rose from a common source.

    However, when I said “something has to give”, I didn’t specify what. One of the very first things to “give” always seems to be accounting rules and their enforcement. Look at the shameless “off-budget” treatment of Social Security in the U.S., let alone the cash flow accounting of most European nations. Yeah, yeah, I know: SS isn’t really “off-budget”, but the surplus into the account is offset against the national debt, placing it effectively off-budget by any reasonable definition.

    What similar methods might be used to allow companies to overstate profits, thereby allowing the govt. to claim more in tax receipts? I doubt the process would be as openly cynical as that, but a public concern with economic factors will encourage public officials to be more open to business arguments that allow them to recognize “currently unrecognized profits” under the aegis of a more “business-friendly” environment to spur growth. In seeking to solve the problem, the politicians will have treated the symptom, by making the numbers look temporarily better, but introducing no sustainable improvement.

    Italy as a whole has long been regarded as a bit fast and loose with accounting and general business practices compared to other European countries (or so I’ve read many times over the years). You could switch causality and say that it is these practices that utlimately allowed the country’s finances to decay. That wouldn’t explain the demographics (unless the populace has become uncontrollably cynical), but it would explain the relatively high level of Italian public debt, which is exacerbating the demographic challenge. After all, if every number is fake anyways, who cares about public statistics? The numbers are meaningless.

    Some idiot (I forget which) in the White House recently made that argument public. He may even be right, although I tend to doubt it.

  7. CORRECTION: The joker in the White House (I really ought to look up the individual’s name), did not say the deficit was meaningless because all the numbers are fake (as I implied). Instead, he just said that deficits were not meaningful. It falls into the same category of, “How do these numbers ever relate to my ability to buy food?”

  8. When I last looked Italy’s net external assets were broadly in balance. Not a good position for a nation with the demographic problems of Italy, but not as disastrous say as some others.

    Hence that Italy has one of the largest public debts in the world is counterbalanced by the fact that it has one of the highest savings ratios in the world. These things can therefore be resolved.

    Also I think you underestimate the strength of the Italian economy, two anecdotal pieces, FDI inflows actually increased in 2002 over 2001, and tourists aren’t suddenly going to stop going.

  9. Italy is more likely in a vicious cycle: as they get poorer, they feel less able to afford children.

    This is a bourgeois complaint, the truly poor are r-strategists.

    The Argentinians did not require a war, nor did the U.S. in the 1930s.

    Bubbles inflict damage, yes. But if you want to argue that they trigger a long-term decline, you’ll need to cite examples less recent and less ambivolous, respectively.
    ….
    As for the U.S. Social Security situation:

    I think that Bush and Greenspan are playing with radioactive fire. I think that U.s. Republican leadership is too rich and insular to realize that Social Security is a matter of survival for millions of american who would then be faced with Katherine Gun’s dilemna:

    Do nothing and die or fight and die.

    The choice seems obvious, I think. The consequences…Terreurfying.

  10. The truly poor may be r-strategists (I have no idea what that means, and am taking it’s meaning from your context), but in that event, Italy will have to subside to something closer to India’s level before that factor kicks in. Mine may be a bourgeois complaint, but Italians are not truly poor. Widespread famine is not an issue in Italy in the foreseeable future.

    Unless, of course, the system suffers some sort of catastrophic collapse. Almost by definition, the Italians will not become r-strategists until it is too late to solve the problem.

    My examples may be archaic and predominantly financial in nature, but how often does one get to witness the evolution of a problem that has built up over the course of a few generations and threatens most of the Western economies simultaneously (inc. Japan)? The answer must be at most only once every few generations. The Russian default and the South East Asian crises were both primarily monetary (currency) problems, but that was merely where the fault line was, the weakest point that gave out first. I am less familiar with the Asain crisis, but if Argentina or Russia had been part of a larger currency, something else would have had to give eventually.

    I think my “traditional” course (traditional not just for the Italians, but for countries as a whole) is a fair projection of what would happen in the absence of the euro. When you have a massive underlying imbalance, politicians are almost universally unwilling to make painful choices until it is far too late. The more interesting area of speculation is what else will break first, if the situation is not otherwise resolved.

    As an aside, Italy may be in fine financial shape. However, their demographics are widely cited (I have no figure to hand, although I recall seeing them at one point) the worst. I feel the demographic time bomb is really driving the issue (again, no numbers in support, just an opinion). Given the choice between healthy current accounts (not just the trade statistic of that name) and stable demographics, I don’t think anyone would prefer the former for long term stability.

    Katherine Gun’s dilemma (again, no reference except context) is identical to my argument that the definition of “working age” must change. You can either be retired and starving because there is no money for your state pension, or you can seek employment (prob. black market) and try to garner a little extra support. If you elect the former, you will still contribute to an adjustment of the ratio of “working age” population via Darwin’s solution. You will not remain among the “retired” for very long.

    U.S. Social Security arrangements are a disaster, and I think everyone can agree on that. However, I believe both the French and the Germans make no provision at all for recognizing their future liabilities, not even the half-hearted fiction that the U.S. passes off on the rate payers. They also have a great deal less privately funded pensions, I believe. Once again, I have no hard statistics to hand, but I recall reading a series of article on exactly that topic in The Economist a few months ago.

    Britain is the best positioned regarding private funding of pensions (never guess where The Economist is based). The U.S. lies about halfway between Britain and France/Germany. I am fairly certain that ranking was the unfunded, off-budget, future obligations of the governements as a ratio of GDP, but the figures may have been the ratio of individual pensions vs. corporate/govt. pensions (corp. pensions inc. because they are usually guaranteed by govt.). The two statistics were very closely correlated, though, which was sort of the entire point behind the series.

  11. Katherine Gun would be the british translator against whom charges were just dropped, for willfully violating the Official Secrets Acts in exposing British spying on U.N. member states for the U.S.

    AS to K- and r-strategists, scroll to the bottom of this PDF for a quick summary.

    As to your examples being too archaic, on the contrary, if you’re arguing that the collapse of a financial bubble (international credit, stock) has a demographic impact, I don’t think that your examples aren’t archaic enough. The netherlands survived tulipmania, Britain survived the collapse of the South Seas company bubble…

    While Bubbles may be painful (I consider Palarmat to be a minor bubble), I believe that they are less risky, in terms of economic collapse, than periods of prolonged severe economic hardship.

    Economically, I think the 1930 stock market crash was less significant in terms of demgraphic change than Oklahoma turning into a dust bowl right around the same time.

    As to U.S. Social Security situation, I think Slactivist had the best take on it.

  12. errr,
    make that either “I don’t think that your examples are archaic enough.”, or ” I think that your examples aren’t archaic enough.”

    Alas, I am not a copy-editor.

  13. A bit of a reverse course: I was arguing that financial crises do not affect demographics significantly. That is why Italy will not adopt an alternative strategy any time soon. My mention of a “vicious cycle” was merely a gloss in the opposite direction (a compounding of current problems), if anything.

    It was actually you [Patrick (G)] that wrote: “That said, that sort of economic activity would likely trigger a switch from a r-selected reproductive strategy to a K-selected strategy.”

  14. Hi everyone, I’ve been away. In my absence I notice you have been busy.

    I have nothing more to add. Mr or Ms Taylor has said everything I would want to say, without my needing to say it. Hooray. Thank you.

    “Italy as a whole has long been regarded as a bit fast and loose with accounting and general business practices compared to other European countries……You could switch causality and say that it is these practices that utlimately allowed the country’s finances to decay. That wouldn’t explain the demographics (unless the populace has become uncontrollably cynical), but it would explain the relatively high level of Italian public debt, which is exacerbating the demographic challenge. ”

    I’m preparing something ‘light’ on all this for Monday, just to illustrate your thesis.

  15. There’s something wrong with Europe, I think, which makes me wonder why there’s so much fuss with the EU. It’s kind of like the Muslim world. By the time they realized they *should have* (or should be?) uniting, it’s too late and they’re on the decline. That was a 100 yrs ago for the Muslim world, but regardless.

    http://avari.blogs.com/weblog/2004/02/to_eu_or_not_to_1.html

    Why Turkey should not join the EU.

  16. I don’t mean this as snark directed at Patrick (G), but may I just say that I find this habit of sorting human populations into r- and K-strategists deeply annoying. All humans are K-strategists (though some might not be very good ones.

    One normally speaks of species as r- or K-strategists, not individuals. Though humans differ in their reproductive patterns, their differences pale to nothing compared with the reproductive patterns of r-strategist species.

    It is telling that one often finds the r- and K-concepts applied to human populations by those trying to put a pseudoscientific gloss on racism, e.g. J.P Rushton. (NB I am not accusing Patrick in any way of doing this). As used of humans, ‘r- and K-strategy’ is at best a metaphor; and not, I think, a very helpful one.

  17. Mrs. Tilton,
    All humans are K-strategists

    I think that the evidence for this assertion is rather thin. Consensus is that pre-agrarian society; we were limited by our environment to an K-strategy/subsistence lifestyle. The population explosion that came with agriculture points to an r-strategy. Modern urban societies seem to produce K-strategists…mainly because we’ve made the cost of raising children so expensive that having more than a few is socio-economically risky.

    I could be wrong, but I think that the social environments that we create for ourselves is usually contra-indicative of our true nature; we put barriers against what we would do naturally because we see long-term advantage in resisting our base nature.

    e.g. miscegenist laws were put in place in many states in the U.S. not because interracial marriage was unnatural, but precisely because it is natural,…and the whites who put those laws into place rightly, if despicably, saw long-term social advantage in keeping non-whites down.

    As to r-/K-strategies, I think that humans are mostly self-aware enough as individuals to choose their own reproductive strategy; but we tend to do so based on socio-economic expectations.

    Back to India vs. Italy. I see India’s task (improving the economy for its large population) as more difficult than Italy’s task (maintaining its economy for a much smaller population).

  18. Back to India vs. Italy. I see India’s task (improving the economy for its large population) as more difficult than Italy’s task (maintaining its economy for a much smaller population).

    I’m not being critical, but this is a really interesting statement that I had to read about five times before it stopped making sense in the context I was reading it in. I must be getting old (or at least stupid).

    I assumed the statement addressed the relative probability of India growing to Italy’s GDP/capita standing, as opposed to Italy sinking to India’s level. The statement appeared to address that issue. It apparently made perfect sense in that role.

    Look at the first proposition: “India will grow, and Italy remain constant.” But that cannot be the most likely outcome, because India’s task is the more difficult of the two.

    The second proposition, “Italy will shrink to India’s level,” also cannot be the more likely outcome, because Italy’s task (remaining level) is the easier task.

    I really must be getting old, because even once I saw that, I still couldn’t sort it out immediately.

    The trick is simple: those two tasks (India growing and Italy remaining level) both apply only to the first proposition. The statement, while valid, says nothing to distinguish between the two propositions established by the context in which I read it.

    You would think that since “Italy remaining stable (or growing)” is the logical compliment (converse case) of “Italy shrinking”, and that “India growing” is the logical compliment of “India stable (or shrinking)”, the statement ought to contain information useful in differentiating the two cases. It doesn’t. I’ve tried every way I can to contruct a set of symbolic logic and probability statements to extract differentiating information, and not one of them works.

  19. You would think that since “Italy remaining stable […]” is the logical compliment (converse case) of “Italy shrinking”

    now why would I think that ?
    Consider again that my argument was that Italy’s economy can shrink AND maintain a stable GDP per-capita ratio.

    I’ve tried every way I can to contruct a set of symbolic logic and probability statements to extract differentiating information, and not one of them works.

    if the change in GDP is roughly congruent to the change in population, the economic situation of the country will remain stable despite the decline in both the numerator (GDP) and denominator (Population) of the ratio.

    Mathematically, for Italy, a shrinking population helps its GDP per capita ratio, for India a growing population hurts it.

  20. Tsk, tsk and for shame…you really hacked that excerpt from my comment out of context. As presented, it is not even a sentence. It also looks like I said, “Italy remaining stable is the logical compliment of Italy shrinking,” which is patently untrue. The excerpt you wanted was probably

    You would think that…the statement ought to contain information useful in differentiating the two cases.

    I’d be the first to admit that Italy’s GDP can shrink while its GDP/head can remain stable. That’s obvious. It is within the context of deciding if Italy will shrink to India’s level, or if India will grow to Italy’s level that I found the statement meaningless. That is also the context in which I initially read the statement of yours I was discussing.

    If we’re going to go back around that bush a few more times (I’m not averse) then let me state again (and more clearly) that I think that the quickest (i.e., most likely short term) way for the two to converge is through an Italian contraction, not an Indian expansion. A large, sudden decrease of GDP is much more likely than a sudden increase of comparable proportion. A 12-month Italian contraction of 10% would be highly unlikely, but not unprecedented. The corresponding 12-month Indian expansion of 20% would be entirely unprecedented and nearly impossible.

    I am not referring to the specific nature of either country for precedents, but to economic movements in large countries as a group. In general, growth is more likely than contraction. However, large contractions in a short time are much more likely than correspondingly large expansions in the same amount of time.

  21. Tsk, tsk and for shame…you really hacked that excerpt from my comment out of context. As presented, it is not even a sentence.

    I parsed your complete sentence as (condition A AND condition A’) implies (conclusion). And then demonstrated that (condition A) quoted was “patently untrue” as you put it, the (conclusion) thus irrelevant. Straightforward logic.

    It is within the context of deciding if Italy will shrink to India’s level, or if India will grow to Italy’s level that I found the statement meaningless.

    let me state again (and more clearly) that I think that the quickest (i.e., most likely short term) way for the two to converge is through an Italian contraction, not an Indian expansion. A large, sudden decrease of GDP is much more likely than a sudden increase of comparable proportion. A 12-month Italian contraction of 10% would be highly unlikely, but not unprecedented. The corresponding 12-month Indian expansion of 20% would be entirely unprecedented and nearly impossible.

    Italy’s GDP per capita is 10 times India’s GDP per capita. a one time 10% drop in Italy’s GDP per capita does not a convergence make.

    I expect India can grow to converge with Italy, but on a generational time-scale, not a 12-month time scale.

  22. I expect India can grow to converge with Italy, but on a generational time-scale, not a 12-month time scale.

    I’d expand the scale to emphasize “multi-generational”, but otherwise would agree. I might also say “not anytime in the foreseeable future”, as predictions running out 50 years tend to be a bit silly: a lot can happen between now and then to change everything.

    The only realistic way I can see them converging in a shorter span of time is through a meltdown in Italy.

    (Allowing a very high 5% convergence rate, it takes 47 years for the two to converge. A moderately optimistic 2% rate puts it over 100 years.)