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Italy
Prometeia Brief
September 2016 — No. 16/5
Executive summary
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After halting in 2016q2, we project a very slow resumption of growth in q3 and q4
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Weak domestic and external demand over the summer led us to revise 2016 and 2017 GDP growth down by 0.1pp
▶▶
Our first InFocus looks at the financial position of Italian firms (compared to Spain)
▶▶
The second InFocus is on the recent difficulties of the Italian export sector
GDP and inflation
The Italian GDP growth rate in the second quarter
was slightly lower than expected (zero instead
of 0.1 per cent q-o-q). The growth rate in 2016
and 2017 is expected to be 0.7 and 0.8 per cent
respectively, one of the weakest in the EMU.
The 2016q2 slowdown is due to weaker domestic
demand, which reduced its contribution to growth
compared to the previous quarter (from 0.4 per
cent q-o-q in 2016q1 to -0.1 in 2016q2). In particular,
private consumption of durable goods was weak
and investment declined (from +0.8 per cent
q-o-q in 2016q1 to -0.3 in 2016q2), mainly because
of a decline in machinery and equipment. Net
exports contributed positively (+0.2 per cent, from
-0.3 in 2016q1). Looking to the second half of this
year, households and company economic climate
indicators continued to decline in July and August
(they fell more than in Spain and France; in Germany
Table 1 GDP growth quarterly profile
GDP (% change q-o-q)
in bold historical data.
2016q2
2016q3
2016q4
2017q1
0.0
0.1
0.1
0.2
these indicators increased). The uncertainties
related to the solidity of the financial sector and to
the upcoming constitutional referendum (to be held
on December 4th) are taking a toll on activity.
The labour market shows a different picture. Even if
the unemployment rate decreased only marginally
(from 11.6 per cent in 2016q1 to 11.5 in 2016q2), the
increase in employment is remarkable. In contrast
to the very slow recovery of GDP, hours worked
increased (+0.5 per cent q-o-q in 2016q2, and +2.1
y-o-y), as did full-time equivalent employment (+0.4
per cent q-o-q and +1.3 y-o-y) and the number of
employees (+0.8 q-o-q and +1.7 y-o-y). In the first 6
months of the year, employees increased by 220
thousand and all the economic sectors contributed
positively to this growth, with the sole exception of
construction.
Consumer inflation was still negative in August,
largely driven by the energy component. In the rest
of the EMU consumer inflation is positive since
June. Core inflation in Italy remains positive but low
(+0.8 per cent), due to weak domestic demand and
unit labour costs. ▪
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Italy – Prometeia Brief
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Public finances
The Update of the Economic and Financial
Document (presented on September 27th) revises
downwards the GDP growth for 2017 to 1 per cent
(from 1.4 per cent in the Economic and Financial
Document of last April) and upwards the public
deficit up to 2.4 per cent (from 1.8 per cent).
Although the government has revised also the 2016
GDP growth rate down by 0.4 percentage points
(from 1.2 per cent to 0.8), it has increased the 2016
deficit target only marginally, to 2.4 per cent from
2.3 per cent. This year the low interest rates on
government debt should bring savings of €3 billion
and, on the revenue side, the increase of direct and
indirect tax revenues (2.3 per cent y-o-y in the first
semester of this year) appears to be significant.
The Update of the Economic and Financial
Document takes into account the new challenges
presented by the weaker macroeconomic scenario,
revising the targets accordingly. In particular, the
deficit to GDP ratio for 2017 is now set at 2.4 per
cent (from 1.8 per cent), including expenses related
to the recent migration and earthquake events for
about 0.4 percent of GDP. The document cancelled
the so called “safeguard clause” (an automatic
increase in VAT and other taxes of €15 billion in the
event of lower than targeted public expenditure
savings) and it has only partially compensated
it by lower expenditure (€8.2 billion). Based on
this new information, the fiscal stance will still be
expansionary in 2017, but less so than in 2016.
In summary, for 2017 the Government has
acknowledged that the targets set in April
were unrealistic in view of both the weaker
macroeconomic scenario and the tight fiscal stance.
The new targets in terms of both the GDP growth
rate and the deficit as a GDP ratio are now closer to
our forecast (Tab. 2).
▪
Table 2 Italy: macroeconomic scenario (% change)
GDP
Imports
Household consumption
Government expenditure
Gross fixed capital formation:
- machinery and equipment
- constructions
Exports
2015
2016
2017
0.6
5.8
0.9
-0.7
0.7
2.6
1.1
0.4
0.8
2.9
0.7
-0.4
2.1
-0.9
2.7
0.7
2.1
1.3
General government fiscal balance*
Structural balance*
General government debt*
4.1
1.7
2.8
10 year government bond yield
Consumer prices
Household disposable income
Total employment
2015
2016
2017
0.0
0.8
0.8
-0.1
2.3
1.0
1.1
1.0
0.4
-2.6
-0.9
132.7
-2.4
-1.3
133.3
-2.5
-1.4
133.9
1.71
1.37
1.26
* % of GDP
National Accounts Aggregates are ESA 2010.
Credit and banks
Credit market shows a dual path: credit to
households continued to increase in July, while in
June credit to firms inverted the positive trend
that began in 2014. The creation of new bad loans
decreased in July, following the trend of the
previous months.
In July, credit to households1 increased by 1.4 per
cent y-o-y, getting closer to the EMU average.
Consumer credit and mortgages, thanks to improved
1 ECB statistics, adjusted for statistical discontinuities and securitizations.
loan conditions, supported this growth. Since the
beginning of the year, the flow of loans to households
reached €7 billion. The growth rate of loans to firms
decreased in both June and July, by 0.1 and 0.5 per
cent y-o-y respectively. Loan growth in Italy was 1.1pp
lower than the EMU average at the end of 2015,
while 2.4pp lower in July 2016.
The growth of bad loans decreased further in July
(0.6 per cent y-o-y, the stock was €198 billion),
following a path already started in the previous
months. This dynamic is due to two components:
first, formation of new bad loans in both corporate
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and household sectors decreased; second,
securitizations increased.
As for the future, credit expansion will also crucially
depend on the improvement of the conditions of
the Italian banks, whose vulnerability to shocks
was exposed during last summer turmoil following
Brexit and the publication of the EBA stress test
September 2016
results. We expect that the Italian banking system
will conduct a process of securitisation and disposal
of a substantial amount of bad loans, which should
almost halve the outstanding NPLs over the next
three years. According to our estimations, the Italian
banking system has the resources to afford this
process. But it is crucial that banks have the time to
do so.
▪
Risks to the projection
▶▶
▶▶
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3
The constitutional referendum to be held in Italy on
December 4th might increase political instability, adding to
the level of uncertainty
Uncertainty might be further fuelled by the total standstill on
several European dossiers ahead of the French and German
elections next year
World demand has bottomed out during the summer and
should regain momentum next year. If this is not the case, the
already fragile Italian recovery would be at risk
Figure 1 Prometeia forecast of annual GDP
growth (central projection and
confidence levels)
2.0%
1.5%
1.0%
0.5%
0.0%
2015
99%
2016
95%
90%
2017
central projection
Prometeia calculations (see December 2015 Brief for
methodology).
Firms’ financial resources during the recovery:
Italy vs Spain
InFocus
In Italy and Spain, the access to credit for companies has improved in the last two years. The “Survey on
the Access to Finance of Enterprises”1 confirms that, after a long period of contraction, the trend has
reversed. Specifically, large firms acknowledged an improvement since 2013 of the terms and conditions
of bank financing (such as loans, overdrafts and credit lines, Fig. 2), more pronounced in Spain than in
Italy. On the other hand, small and medium-sized firms reported slower progress, that started only one
year later and was weaker in Italy in any case.
The widening of credit availability, more evident in Spain than in Italy, can also be due to different starting
levels. In fact, credit flows to Spanish companies have experienced, between 2011 and 2013, a much
steeper decline than in Italy. Since 2014, the credit fall slowed down in both countries, especially in Italy,
consistently with the credit flow that in 2016 became positive (+€5.2 billion until July), while in Spain is
still negative (-€3,4 billion).
In Spain, the still weak credit flow can be explained by the drop in loan demand of companies, possibly
offset by an improvement of their internal financing. The increase in capitalization in Spain (Fig. 3, lines)
has made available new resources for investment, in addition to those arising from improved profitability
(Fig. 3, bars). Italian firms experienced an increase in capitalization after 2011, albeit of lower intensity
than in Spain. However, Italian firms experienced a decline in profitability since the early 2000s, and they
continue to lose ground compared to the Iberian ones.
1 Survey conducted every six months (September and March) by the ECB on a sample of enterprises excluding those from the
education and health sectors.
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Italy – Prometeia Brief
Figure 2 Firms’ bank financing terms and conditions
(net percentages*)
60
Italy - large
40
Spain - large
Italy - small and medium
Spain - small and medium
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Figure 3Capitalization and profitability
of non-financial companies
0.55
0.50
0.45
20
0.40
0
0.35
0.30
-20
1999
2002
2005
2008
2011
2014
Italy - EBITDA / Added Value
-40
set-09
mar-10
set-10
mar-11
set-11
mar-12
set-12
mar-13
set-13
mar-14
set-14
mar-15
set-15
mar-16
Spain - EBITDA / Added Value
Italy - Equity / Liabilities
Spain - Equity / Liabilities
Prometeia calculations based on ECB data, SAFE (Survey on the Access Source: Prometeia calculations based on Eurostat data
to Finance of Enterprises)
* difference between the percentage of enterprises that experienced an
increase and those that declared a decrease in the available size of loans
and credit lines
Spanish firms appear to be better able to diversify the sources of funding than Italian ones, especially
Spanish medium and large size firms, considering their easier access to non-bank credit channels. The
deleveraging process that both economies have experienced reflects the will of companies to decrease
their dependence on bank credit. If this phenomenon proves to be structural, economic recovery will not
be accompanied by a corresponding growth in demand for credit. In Italy, however, since low profitability
does not allow small businesses to replace bank loans with self-financing, the improvement of access to
credit remains crucial not only for larger firms, but also for smaller companies.
Italian export, struggling to keep up
Although the Italian export of goods increased more (in real terms) in the second quarter than those of
Germany and France (but not of Spain), the export growth gap continues to be notable since after the
Great Recession. While Italian exports reached pre-crisis levels only in 2015 (and now are just 4 per cent
above), the French, German and Spanish exports have already substantially exceeded their pre-crisis levels
(by 9.8 per cent, 19.4 per cent and 30.8 per cent respectively).
Italian export dynamic appears indeed weak in comparison with the European partners (in Fig. 4 positive
values indicate a worse export performance of Italy compared to the other countries).2 This weakness was
already present before the Great Recession and Italian firms tried to address it by implementing profound
structural changes. These changes fostered a process of export quality upgrading as well as of export
market diversification, gaining access to new and more dynamic markets.3
The relative weakness of the performance of Italian exports in strategic areas is particularly evident when
compared to the export performance of Spain (Fig. 5). More specifically, Spain fared better not only in the
traditional sectors (“supplier dominated”4 in the graph), but also in the others. In addition, in the “specialized
2 However, due also to the euro depreciation, in the period 2011-2015 Italian exports on average grew more than foreign demand.
3 Prometeia Forecast report, October 2014, chapter 9.
4 The areas were divided into four categories according to the Pavitt taxonomy, which classifies products on the basis of technological and market structure.
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September 2016
5
Figure 4Exports of manufactured goods: growth rate Figure 5Exports: growth rate differences between
differences between the mentioned countries
the mentioned countries and Italy, 2014-2016
and Italy (pp, current prices)
cumulated (pp, current prices)
8
45
6
36
4
27
2
18
0
9
-2
0
-4
-9
-6
-18
-8
2001
2004
2007
Germany
2010
2013
France
Spain
Source: Prometeia calculations based on Eurostat data
* First semester
2016*
science
supplier
scale
based
dominated intensive
Germany
France
specialized
suppliers
Spain
Source: Prometeia calculations based on Eurostat data
suppliers” areas, which comprise the engineering industry, the differences compared to Germany, which
shares high comparative advantages with Italy, are high.
Furthermore, the important changes implemented by Italian companies do not seem to be sufficient to
close the gap with other countries, especially with Spain which managed to “sell caviar to Russians, shoes
to Chinese and cars to Germans”.5 The success of Spain, combined with lower labour costs and a draconian
labour market reform, has certainly contributed to the high inflows of foreign direct investments (FDIs)
experienced by the Spanish economy (while in Italy FDIs have still a low importance compared to other
countries).
5 Moffet, M., Export Prowess lifts Spain from Recession, The Wall Street Journal (30th October 2013).
Copyright © 2016 by Prometeia, Bologna, Italy
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based on data available on 28 September 2016
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