Addressing present and future challenges

EcoPerspectives // 1 quarter 2020  
Addressing present and future challenges  
Italy continues to record a cycle of subdued activity, with the annual growth rate of real GDP slightly above zero, as a result of the  
feeble growth in services, the modest recovery in construction and the persisting contraction in the industrial sector. From Q1 2018  
to Q3 2019, manufacturing production has fallen by more than 3%, with the strongest declines in the sector of means of transport, in  
that of metal products and in that of textile, clothes and leather items. Together with the short term slow down, Italy is going to face  
long term challenges due to the ageing population and its impact on the labour force and the pension spending.  
Slowing exports, moderate growth  
1- Growth and inflation  
Since the beginning of 2018, Italy has been experiencing a cycle of  
subdued activity. In Q3 2019, real GDP rose by a mere 0.1% q/q for  
the fourth quarter running, despite a 0.3% positive contribution of  
stocks, with the annual growth rate slightly above zero.  
GDP Growth (%)  
Inflation (%)  
In Q3, net exports subtracted 0.4% from the overall GDP increase,  
as imports rose by 1.3% q/q, while exports declined by 0.1%.  
According to trade balance data, Italian exports have significantly  
slowed, reflecting the still weak international environment. In the first  
ten months of 2019, Italian sales abroad rose by 2.7% on annual  
basis, from +3.6% in 2018 and +7.6% in 2017, held back by Euro  
area slowdown. Exports to Germany, which account for about 13%  
of total, remained unchanged, suffering from the strong weakening  
of the manufacturing sector in this country, with sales of Italian  
metal products declining by more than 3%. On the contrary, the  
increasing risk of a no-deal Brexit supported exports to the United  
Kingdom, while those to the United States benefited from the  
strengthening of industrial activity, with sales of Italian machinery  
rising by 9%.  
Source: National accounts, BNP Paribas  
- Italy: manufacturing value added  
% change)  
q/q  y/y  
Strong consumption, feeble investment  
In Q3, domestic demand added 0.2% to the quarterly GDP increase,  
as the robust dynamic of private spending more than offset the new  
contraction of investment. From July to September, consumption  
rose by 0.4% q/q, with the propensity to stay stable at around 9%.  
Household nominal disposable income continued to increase,  
benefiting both from the introduction of the citizenship incomeat  
the beginning of the year and from the further moderate  
improvement of labour market. In Q3, the number of persons  
employed rose above 25.5 million, the highest in the last twenty  
years, and that of hours worked partly recovered, despite remaining  
well below the pre-crisis level. Besides, the feeble dynamics of  
prices, with the annual inflation below 0.5%, has further sustained  
the evolution of the purchasing power of Italian households.  
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019  
Source: BNL calculations on Istat data  
Given the persisting uncertainty surrounding the economic and  
political scenario, Italian firms have further increased their buffer of  
liquidity, with the value of their bank deposits above USD 370 billion.  
After having increased in the first half of 2019, also benefiting from  
the renewal of tax incentives, in Q3, investment declined by 0.2%,  
as those on means of transport strongly contracted and those on  
construction were virtually unchanged. Capital spending continued  
to suffer from the challenging evolution of profitability of Italian firms,  
which remained extremely cautious on their spending decisions.  
The propensity to invest, measured as the ratio between investment  
and value added, is still about 2.5 percentage points below the pre-  
crisis level, with USD 20 billion of lower annual capital expenditure.  
Manufacturing holds down economic growth  
The still disappointing evolution of the Italian economy reflects the  
slightly positive growth of value added in services, the modest  
recovery in construction and the persisting contraction in the  
industrial sector. In Q3, value added of manufacturing declined by  
.2%, after -0.3% in the previous quarter, with the annual growth  
rate falling in negative territory (-0.6%), from +5% reached at the  
EcoPerspectives // 1 quarter 2020  
end of 2017. From Q1 2018 to Q3 2019, manufacturing production  
has declined by more than 3%, also as a consequence of the  
Germany industry slowdown. A strong contraction has been  
recorded in the automobive sector (-23%), in that of metal products  
- Italy: average old-age to working-age ratio  
(65+ years old per 100 people 20-64 years old)  
2020  2060  
-7%) and in that of textile, clothes and leather items  
Ageing population poses new challenges  
In the recent months the debate over the sustainability of public debt  
in Italy has gone hand in hand with the concern about the ageing of  
population and the challenge of maintaining adequate old age  
benefits while limiting fiscal pressure on current workers. The  
concern is all the more justified in Italy in the light of the burden of  
public pension spending, which in % of GDP is twice the OECD  
average: 16.2% compared to 8%.  
Source: BNL calculations on OECD data  
According to the most recent OECD data, in Italy the old-age to  
working-age ratio amounts to 40 (i.e. there are 40 individuals aged  
of contributions (instead of 67 years statutory required in 2018, with  
a contribution record of 42.8 years for men and 41.9 for women).  
The measure has a labour income ceiling aimed at limiting work  
incentive. According to INPS (the Italian National Welfare Institute)  
by November 2019 205,208 employed applied to access “Quota  
5+ per 100 persons aged 20-64), a value second only to the  
Japan’s one (52). By 2050, that ratio in Italy is expected to reach  
5.5, compared to 56 in France, 60 in Germany and 77.7 in Spain.  
The evolution of such ratio depends, among other things, on the  
dynamics of the fertility rate, which in Italy has been decreasing for  
some years now. According to Istat, in 2018, 439,747 babies were  
born, about 18k less than in 2017 (-4%) and 140k less than in 2008  
100”, mostly in the Southern regions. Among the applicants about  
74% are men, 40% are less than 63 years old and 18% are over 65  
years old. According to some preliminary analyses most applicants  
are residents in provinces characterized by high levels of  
unemployment and lower-than-average per capita value added.  
-24%). The decrease in the number of new births is 67% due to the  
decline in the number of fertile women (those aged 15 to 49) that  
are today one million less that in 2008, and 33% to a decline in the  
fertility rate, from 1.45 children per woman in her fertile age in 2008  
to 1.29 in 2018. Also declining is the contribution of migrant women  
to total fertility.  
Besides the burden it represents for public spending, the Italian  
pension system has some important shortfalls that deserve to be  
corrected: first and foremost, the impact that career breaks have on  
final pensions benefits. The close relationship between individual  
contributions and benefits in Italy’s notional defined contribution  
scheme makes any career break particularly painful: according to  
OECD estimates, a 5 years break in the career of an average  
worker in Italy leads to a 10% decrease in his/her pension, against  
about 6% in OECD average. The problem is amplified by the spread  
that temporary jobs have had in the recent years. According to Istat,  
the share of temporary employed on total employment steadily  
increased from 13.5% in Q2 2008 to 16.9% in Q2 2019. Also  
increasing is involuntarily part time employment, while the number  
of self-employed workers, although slightly declining from 2008, is  
still significantly higher than OECD average (20% compared to  
about 15%). This difference is relevant, as self-employed pay lower  
contribution rates and receive, on average, lower pension than  
retired employed. This gap reaches the maximum of 30% in Italy,  
along with Germany and France.  
The decline in fertility has been accompanied by a decline in  
mortality, which has led to a significant increase in the life  
expectancy at birth in the country, from 66.5 years in 1950-55 to  
83.3 years in 2015-20, one of the highest values in the world; above  
the OECD average is also life expectancy at age 65: 20.9 years  
against 19.7.  
The increase in life expectancy has originated a significant increase  
in the proportion of the elderly people: the over-65 years old that in  
1950 accounted for 8.1% of the total Italian population, in 2019  
represented up to 22.8%. In the same period, the weight of the 0-14  
years old class basically halved from 26.7 to 13.2%. Among the  
elderly people, 14,456 persons are at least 100 years old: a record  
value in Europe that Italy shares with France. In the decade  
between 2009 and 2019 the over 100 years old grew by more than  
Italy has one of the highest future normal retirement age (71) among  
the OECD countries, along with Denmark (74), Estonia and the  
Netherlands (71). Like many other countries (e.g. the Netherlands  
and Spain) Italy has recently introduced measures (such as the so-  
called “Quota 100” Decree in 2019) which backtrack on previous  
policies that had been put in force to increase retirement age.  
Paolo Ciocca  
“Quota 100” is a temporary measure applying until the end of 2021,  
which lets workers retire at age 62 provided that they have 38 years  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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