Perspectives

Losing momentum

rd  
12  
EcoPerspectives // 3 quarter 2018  
economic-research.bnpparibas.com  
Italy  
Losing momentum  
At the beginning of 2018 the Italian economy decelerated. Real GDP rose 0.3% with negative contributions from both net exports and  
investment. Household consumption increased, supported by the recovery in the labour market. In Q1 2018, employment in Italy  
returned to its pre-crisis level thanks to the increase in the number of dependent employees. During recent years, the state of public  
finances has improved. In 2017, the public debt-to-GDP ratio fell to 131.8%. The new government have presented a detailed  
programme with the simplification of both fiscal and pension systems and the introduction of universal income support. The new  
minister of treasury stated that the new measures will be consistent with the goal of reducing the debt-to-GDP ratio.  
Increasing consumption, disappointing exports  
1
- Growth and inflation  
In Q1 2018, real GDP grew 0.3% q/q. The annual growth rate  
declined from +1.7% in Q3 2017 to +1.4%. The slowdown reflected  
the worsening of conditions in the industry sector, with value added  
declining 0.1% q/q while services increased 0.3% and construction  
stagnated. From January to March, inventories added 0.7% to  
overall growth. Net exports subtracted 0.4% as exports fell more  
than imports, respectively -2.1% and -0.9%. The contribution of  
domestic demand was nil. Fixed investment declined 1.4% with  
spending on machinery and equipment falling almost 3%.  
Household consumption increased 0.4%, continuing to be supported  
by the improvement in the labour market.  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
1
.7  
1
.6  
1
.4  
1.3  
1.4  
1
.2  
1
.0  
0.8  
0.1  
-
0.1  
1
5
16  
17  
18  
19  
15  
16  
17  
18  
19  
The labour market recovers  
Source: National accounts, BNP Paribas  
In Q1 2018, employment in Italy increased to around 23.1 million:  
persons, which was about 6,000 more than the level in Q1 2008.  
The return to pre-crisis levels is entirely due to the growth in the  
number of dependent employees (704,000 more than in Q1 2008)  
and particularly to the increase in fixed-term contracts (+617,000).  
In the decade since the crisis began (2008-2018), the number of  
independent workers decreased 11.9% (about 710,000 persons).  
Thus, the employment rate for the 15-64 year-olds in Italy reached  
The employment rate of Italian women with a higher education is  
quite similar to the European averages. In Q4 2017, the  
employment rate for women in Italy who attained a tertiary  
education was 75%, 25.8 percentage points higher than the total  
national figure and 9.7 p.p. lower than the corresponding rate in  
Germany (the gap is narrowing, though, as it was 11 p.p. in 2016).  
The gap between it and the rate in France that widened during the  
crisis has successively returned to about 5-6 p.p., the same as in  
58.2%, the same a level as in the pre-crisis years. Despite the  
2
008.  
recovery, the Italian rate remains low in comparison with the  
country’s main eurozone partners: in France in Q1 2018 employed  
persons aged 15-64 accounted for 64.8% of the population in the  
same age group, in Spain 61.1 % and in Germany about 76%. The  
employment rate of women in Italy is 12.3 percentage points lower  
than that of women in France, 23 pp lower than that of women in  
Germany and 7 p.p. lower than that of women in Spain. The gap  
widens further for younger women: for those aged between 15 and  
The rise in employment was accompanied by a slight decrease in  
the unemployment rate that was 11.1% in the first quarter of the  
year (11.2% in April, the latest monthly figure available)  
representing 2.9 million people, 135,000 fewer than in the same  
period in 2017. The female unemployment rate is slightly higher  
(12.4%).  
Public balance: lower expenditures, higher revenues  
3
9, the German rate is 25 percentage points higher than Italy’s.  
During recent years, the condition of public finances in Italy has  
improved. From 2009 to 2017, the public deficit was cut in half (from  
EUR 83 billion to EUR 40 billion), falling from 2.5% of GDP in 2016  
to 2.3%, the lowest level in the past ten years. The primary surplus  
remained stable at around 1.5% of GDP while interest spending  
declined to EUR 66 billion, EUR 18 billion less than in 2012. In 2017,  
public support of the banking system amounted to about 0.3% of  
GDP.  
The gap between the number of Italian women in the labour market  
and that of women in its main EU partner countries is much smaller  
if we look at the most educated segment of the population. In recent  
years, the number of university-educated Italian women has  
progressively increased, and in younger age groups it rose more  
than that of males of the same ages. Compared with 19.8% for men,  
the percentage of graduates within the 30 to 34-year-old female  
population in 2017 was 34.1%. This is a significant and rising  
percentage, even though it is still far from the EU average (44.9%)  
and in particular from the level recorded in France, where almost  
one in two women in this age group has a tertiary education.  
The improvement reflects the spending review that has been  
implemented since the beginning of the crisis. Primary expenditure  
declined from 46.3% of GDP in 2014 to 45.1% in 2017. Spending on  
rd  
13  
EcoPerspectives // 3 quarter 2018  
economic-research.bnpparibas.com  
public staff fell from EUR 172 billion in 2010 to EUR 164 billion as  
the number of employees declined and wages increased moderately.  
The cut in capital spending was even more pronounced (from  
EUR82 billion in 2009 to EUR 66 billion) with infrastructure  
investment suffering from new rules for public procurement. Social  
benefits in cash increased to EUR 342 billion as the number and  
average amount of new pensions rose higher. In the long term,  
pension expenditure is expected to decline as the result of several  
reforms that have been approved since the beginning of the 1990s  
that raised the average exit age to the highest level in the eurozone.  
2
- Italy: changes in the public debt-to-GDP ratio  
Contribution of determinants; % of GDP:  
Residual factors Primary balance  
Interest payments ─●─ Change in debt/GDP ratio  
GDP growth  
1
0
8
6
4
2
0
In 2017, public revenues also rose to EUR 800 billion, almost 10%  
more than in 2010 as a result of former consolidation measures (like  
VAT rises in 2012 and 2013). During recent years, the economic  
recovery has increased both social security contributions and tax  
receipts. Revenue from direct taxes rose to EUR 250 billion, with the  
personal component benefiting from the improvement in the labour  
market. Firmstax receipts declined, reflecting the exclusion of  
labour costs from the Italian regional production tax (IRAP) tax base.  
-2  
-4  
-6  
2011  
2012  
2013  
2014  
2015  
2016  
2017  
Source: BNL calculations on Bank of Italy data  
Public debt: improvement only gradual  
During the crisis, the public debt-to-GDP ratio increased from 100%  
in 2007 to 132% in 2014, mirroring the effect of the recession. In the  
3
- Italy: Employment rates by level of educational attainment  
2
012-13 period, higher interest payments and lower GDP explained  
%
, Q4 2017  
Tertiary education  
more than 12 percentage points of the increase in the ratio. The  
financial support given to EU countries added a further 3.5%. In  
 Upper secondary and post-secondary non-tertiary education  
 Less than primary, primary and lower secondary education  
2017, the primary balance more than offset the difference between  
the cost of debt and the growth of GDP, allowing the debt-to-GDP  
ratio to decline by 0.2% to 131.8%. According to the European  
9
0
0
0
0
0
0
0
0
8
7
6
5
4
3
2
Commission forecast, the decline should continue in the coming  
years with the rate falling below 130%.  
The composition of Italian public debt has changed in terms of both  
the type of instruments and the sector of holders. The value of  
securities held by the Bank of Italy rose from EUR 97 billion in 2012  
to EUR 363 billion in 2017 (almost 20% of the total). The non-  
residents share of total debt declined to 32%, one of the lowest  
levels in the eurozone. Moreover, the average residual maturity of  
debt has increased to 7.4 years and improved the sensitivity of debt  
to interest rates changes. According to Treasury Ministry estimates,  
a 100 basis point increase applied to the entire yield curve would  
raise the ratio of interest expenditure to GDP by 0.13% in the first  
year (about EUR 2 billion) and by 0.28% in the second. In the past  
two months, the yield on ten-year government bonds rose by slightly  
more than 100 bps with the spread over the Bund increasing about  
10  
0
Germany  
Spain  
France  
Italy  
Source: BNL calculations on Bank of Italy data  
1
40 bps.  
Professor Giovanni Tria, the new Treasury Minister, stated in a  
recent interview that there must be financial coverage on every  
measure, the budget will be fully consistent with the goal of reducing  
the debt-to-GDP ratio and preparation will follow a continuous  
dialogue with the EU Commission.  
The coalition of the Five Star Movement and the League that has  
formed the new government has presented a detailed programme  
that includes the simplification of the tax system, reduction of  
personal income tax, overhaul of the pension system and  
introduction of universal income support. All these measures will be  
implemented over the next five years.  
Paolo Ciocca  
paolo.ciocca@bnlmail.com  
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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