Italy: macroeconomic analysis

Following a path similar to that of the other euro-area countries, the Italian economy has pulled out of recession and returned to growth. After contracting by more than 6 per cent in the two years 2008 and 2009, GDP grew by 0.5 per cent in the first half of 2010 compared with the year-earlier period and is forecast to expand by about 1 per cent for the entire year. The speed of the recovery is in line with the euro-area average but plainly far below the pace that would be needed for economic activity to rapidly regain the pre-crisis level. All the main components of demand contributed to the fall in Italy’s GDP in 2009. The steepest decline was in fixed investment, which plunged by 12 per cent, but the contribution of net exports was also negative as the drop in exports of goods and services was greater than that in imports (19 and 14.5 per cent, respectively). The contraction in foreign trade was thus much larger than that in output, further reducing the Italian economy’s international openness. This falling back on domestic markets is one of the most striking aspects of the global recession, but in Italy it was particularly intense. The propensity to export and the degree of import penetration fell at constant prices to 24 and 25 per cent, respectively. These are the lowest levels in the European Union, considerably lower than those of countries of comparable economic size, such as France and the United Kingdom. The deficit on the current account of Italy’s balance of payments shrank by about €7 billion in 2009, declining from 3.7 to 3.2 per cent of GDP. The merchandise trade balance (FOBFOB) turned slightly positive as a result of the fall in the prices of raw materials, which led to a much larger reduction in the unit values of imports than in those of exports. By contrast, the deficit on services widened for the fifth year in a row: the reduction in the deficit on transportation, closely linked to the performance of trade in goods, was more than offset by a fresh decline in the surplus on travel and by the increase in the deficit on other services. On the other hand, the structural deficits on public transfers and investment income narrowed. Positive effects on the latter item came from the decline in interest rates and the improvement in Italy’s international investment position, the debtor balance on which remains large (19 per cent of GDP) although smaller than that of other euro-area countries. In the first few months of 2010 Italy’s balance of trade began to worsen again, as the prices of imported raw materials rose and exports grew more slowly than imports (including within the European Union). The value of merchandise exports, which had collapsed by 21 per cent in 2009, grew by 8.8 per cent in the first four months of 2010 compared with the year-earlier period, slightly underperforming the euro-area average (9.3 per cent). The signs of an upturn in exports had first appeared in the summer and they gained strength in the following months as the expansionary impulses originating from the emerging countries spread to other markets. However, the recession snuffed out the incipient recovery that had taken shape for Italian exports in 2007, restoring the declining trend that has characterized the last twenty years. In value terms, Italy’s share of world exports fell from 5 to 3 per cent between 1990 and 2010; over the same period its share of EU-15 exports slipped from 11.3 to 10 per cent. The loss of world export share largely reflects the rise of the emerging countries, China first and foremost. Italian exports are particularly sensitive to the competitive pressure of Chinese exports in both high-income and emerging markets.4 However, another important factor of the decline in Italian exports is their model of specialization, oriented mainly toward products for which world demand has grown more slowly than average. This negative effect of the product composition of exports is a sign of the low income elasticity of demand for them, due in part to the relative dearth of product innovations capable of putting their stamp on households’ patterns of consumption. In periods of rising raw materials prices, it also reflects Italy’s comparative disadvantage in that sector. On the other hand, if commodity prices drop sharply, the product composition effect on Italy’s share of world exports can be positive, as happened on average in 2009. Examining Italy’s share of euro-area exports, the role played by the model of specialization is more evident and was unfavorable even in 2009. Net of the effects of the composition of demand, the performance of Italy’s share in the last decade would have been substantially better than that actually recorded. The recession also influenced exporting firms’ strategies in response to exchange-rate movements. The producer prices of goods sold on the domestic market fell more than those of goods sold on foreign markets (by 5.4 as against 2.6 per cent), contrary to what one would have expected on the basis of the appreciation of the euro. This anomalous pattern was observed in all the main euro-area countries and might be explained by the greater depth of the recession in Europe compared with other regions. Possibly, the fall in domestic demand induced European firms to give up more profit at home than abroad. The prices applied on markets outside the euro area fell more than those applied to intra-area exports (by 3 and 2 per cent, respectively), reflecting, in this more limited field, normal strategies to stabilize prices in the buyer’s currency in response to the strengthening of the euro. The decline in the average unit values of exports was smaller than that in prices, continuing a trend under way for some time that can cautiously be interpreted as confirming an upward shift in the quality of exported products. Up to 2008 this process had been proceeding at a faster pace in Italy than in the other main euro-area countries. Last year the differential was reversed, and the gain in relative quality was much lower in Italy than in France and Germany. However, considering the entire span of the last decade, the unit values of the products exported by Italian firms rose markedly, including by comparison with the European Union average.6 This reflects, in part, price increases, due mainly to slower productivity growth, and, in part, the efforts made by Italian firms to upgrade the quality of their products. The sharp drop in the value of imports in 2009, mentioned earlier, can be traced to almost all the main components of demand, particularly the most import-intensive ones (investment and exports), as well as to the fall in the prices of raw materials. The average unit value of imported manufactures diminished less than the producer prices of goods sold on the domestic market. Imports also began to stage a recovery in the second half of the year. In the first four months of 2010 they were up in value by 12.5 per cent compared with a year earlier, in line with the European average, buoyed by the rebound in production, the recovery in commodity prices and the depreciation of the euro. The recession had slowed the pace of firms’ internationalization of production as early as 2008, causing Italy’s flows of inward and outward direct investment to fall very substantially that year. In 2009 there was a partial recovery.