Italy, before and after Lehman Brothers

Francesco Daveri 05 June 2009

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On 3 June, in parallel with the other European statistical institutes, Italy’s Istat released official estimates of GDP data for the first quarter of 2009. At last, one can meaningfully compare what happened to the Italian economy and the other economies in Europe in the six months after the collapse of Lehman Brothers. The immediate effects materialised in the fourth quarter of 2008, while the less-than-immediate effects, which partially reflect the policy reactions of those who moved quickest (the US and the UK), appeared in the first-quarter data.

To complement the picture shown by aggregate data, it is also greatly helpful to extend the analysis to the monthly industry data on production, sales, orders, and retail sales.

Italy’s GDP, before and after Lehman Brothers

The Istat data shown in Table 1 indicate that, since Lehman Brothers went bankrupt, Italy’s GDP fell by 4.4% in the six months between the first quarter of 2009 and the third quarter of 2008. This is worse than the EU-27 and Eurozone by only a few tenths of a percentage point. In turn, the Europe-wide performance was about one percentage point worse than US growth over the same period of time. Italy has fared much better than Germany, which, with its 5.8% drop over the same period, has once again become the (big) sick man of Europe after being its locomotive in 2006-08. Being the largest exporter in the world has its pros and its cons, and the cons manifest themselves vigorously during a global recession. Italy is also faring much less worse than most countries in Eastern Europe, whose good economic health is tightly intertwined with Germany and Russia and has been seriously hit by the crisis.

Table 1. Is the crisis in Italy not as bad as elsewhere?

GDP growth Italy EU-27 US Germany France UK Spain
q4 2008 vs q3 2008 -21.% -1.6% -1/6% -2.1% -1.2% -1.6% -1/0%
q1 2009 vs q4 2008 -2.4% -2.4% -1.6% -3.8% -1.2% -1.9% -1.8%

After Lehman
(q1 2009 vs q3 2008)

-4.4% -4.1% -3.2%

-5.8%

-2.4% -3.5% -2.8%
q1 2009 vs q1 2008 -5.9% -4.5% -2.6% -6.9% -3.2% -4.1% -2.9%

Note: Row 1 and 2 show quarterly data. Row 3 shows cumulated quarterly data. Row 4 shows yearly data from the first quarter 2009 onto the same quarter of 2008

The Italian economy is faring worse than the UK (whose GDP has gone down by 3.5%) and, even more clearly, than Spain (-2.8%) and France (-2.4%). The data for Spain are particularly worth noting. Spain’s housing collapse has at times been cheered with stadium-like “Ola” on this side of the Alps. It might be that the worst is still to come, but at the moment at least some part of the Spanish economy exhibits a higher than expected resilience to the crisis.

Separating the immediate effects of the crisis from the less immediate ones, one cannot fail to point out that Italy has been more severely hit than the rest of the Euro area (by half a percentage point), except Germany. The less immediate effects of the crisis in Italy are almost in line with the EU27 as well as with the Euro average. This may suggest that Mr. Tremonti may have not been too wrong in saving valuable fiscal resources for the months ahead when the crisis will bite more strongly in the labour market.

In the domestic debate on Italy’s growth performance, it has been emphasised that, in the first quarter of 2009, Italy’s GDP was down 5.9% from the first quarter of 2008. This drop is only partly related to the crisis, however. During the two quarters prior to the Lehman collapse (the second and the third quarter of 2008), the Italian economy had already entered a recession, while the other countries were still away from it. In a nutshell, the trend data indicate that Italy was faring worse than the Euro area and the other big European countries (except Germany) well before the current crisis. To be sure, as emphasised in the picture below, Italy’s hardships do not originate so much from the crisis, but rather from long before it. Due to a prolonged low-growth period starting around 1995 (the last year when the Lira devalued with respect to the Deutsche Mark), Italy fell 20% behind the average of the other “EU big four” in 1995-2008.

Figure 1. GDP growth in Italy and in the other big four European countries, 1995-2008

Industry and services in the monthly data

In March, Italy’s stock market began to rally, even faster than the rallies in other European capitals. This, in addition to still anecdotal good news on the recovery of dynamism of Italian districts’ exports in some foreign markets, has fuelled considerable optimism amongst many observers and politicians. Yet if one takes a closer look at monthly deseasonalised data on industry and retail sales, it is not clear where this optimism comes from. Sure, in March 2009, industry sales went down by a mere 0.8%, which marks the best result since June 2008 after a monthly string of declines of 3% to 4%. This may indeed be seen as a – temporary or permanent – sign of the crisis slowing. It is also true that retail sales recorded a 0.1% increase in March over February.

Yet retail sales data reflect both prices and volumes and may thus record some recovered ability of the Italian distribution sector to cash some of the government-provided incentives and shift the burden of the crisis onto consumers in the presence of still low sales in real terms. Moreover, the – less negative than in the past – industrial sales data are also paralleled by unchanged dynamics of industrial production that has confirmed in March 2009 the same -4.6% as in February 2009. And even the industry data on orders (-2.7% in March) are pretty much in line with the January-February 2009 average.1

If anything, the available data would indicate that the present crisis is evolving as expected. In the first few months, durable producers – the purchase of whose goods may be more easily postponed – have borne the brunt of the crisis. Now, the crisis is broadening to non-durables. Hence it comes as no surprise that sales and production have gone down by some 2-3% in March 2009, after only slight changes in the first months of the crisis. Notably, supermarket sales have also recorded a decline for the first time in their history. If this trend continues in April, it will be a sign that the crisis is moving on to the industries not covered by the incentives provided by the government. The demand for broadening protection would unfortunately go up in this case.

Back to reform to go back to growth

Although the data since Lehman’s collapse are too preliminary to draw definite conclusions, they do not appear to justify the bullish stock market performance in Italy (and elsewhere).

In any case, even if the rare positive signals were to multiply themselves, this would not cancel a very basic truth. If Italy’s government does not push reform more aggressively – issues like pension reform, the schooling and university system, and the labour market – the most likely scenario is that the Italian economy will return to its usual 1% annual growth after the crisis. This is why postponing reforms in today’s Italy is like consuming a luxury good when you are close to starvation. Today’s Italy just can’t afford it, if it wants to resume faster long-run growth.


1 The -3.7% of January 2009 has been made particularly negative by the announcement of future incentives to the purchases of durable goods (cars, white goods) to be implemented soon in February, while the -2.1% of February 2009 has been made correspondingly better by the actual implementation of such incentives.

 

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Topics:  Europe's nations and regions

Tags:  Italy, crisis, GDP growth

Professor of Economics, University of Parma

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