Recession in the short term, demographic challenge in the long term

EcoPerspectives // 2nd quarter 2019  
Recession in the short term, demographic challenge in the long term  
The Italian economy entered the third recession in the last ten years. In 2018, value added in the manufacturing sector recorded four  
consecutive contractions. Domestic demand disappointed, as both households and firms remained extremely cautious. Given the  
deterioration of the overall scenario, in the 2019 Economic and Financial Document recently approved, the Italian Government has  
lowered from 1% to 0.2% the GDP growth expected in 2019, with public deficit at 2.4% and the debt to GDP ratio at 132.6%. The  
structural deficit would worsen by 0.1%, to 1.5%. A progressive ageing of the population makes the scenario even more complicated.  
In the second half of 2018, the Italian economy entered the third  
recession in the last ten years. Real GDP declined by 0.1% q/q in  
Q3 and in Q4. The annual growth rate was nil, from 1.7% a year  
before. The contraction reflected the negative contribution of stocks  
1- GDP growth and inflation  
GDP Growth (%)  
 Inflation (%)  
-0.4% in Q4) and the feeble evolution of domestic demand, while  
net exports sustained GDP increase, as exports rose more than  
imports, adding 0.4% to the overall growth in the second half of the  
A new recession, amid feeble consumption and  
disappointing investment  
The slowdown mainly interested sectors which had supported the  
previous recovery. In 2018, while services and construction  
continued to slightly recover, value added in the manufacturing  
sector recorded four consecutive contractions, with the annual  
growth rate falling from +5% in Q3 2017 to -1.1% in Q4 2018.  
Production of automobiles declined by more than 15% from July to  
Source: National accounts, BNP Paribas  
2- Labour market  
Unemployment rate, % (rhs)  
▪▪ Employment, million (lhs)  
The overall conditions in the labour market further deteriorated. The  
unemployment rate increased to more than 10.5%, with that referred  
to people aged 15-24 stable at 33%. The recovery of employment  
has come to a halt, with the number of persons in work virtually  
unchanged around 23.2 million. The feeble evolution of income,  
together with a slightly stronger increase of consumer prices,  
negatively impacted households’ purchasing power, which declined  
by 0.7% in the second half of 2018. Trying to offset this  
disappointing evolution, Italian households have continued to  
reduce their propensity to save, which fell to 7.6% in Q4 2018.  
From January to September 2018, households financial wealth fell  
by EUR 12 bn, to EUR 4.100 bn, with a per capita loss of almost  
EUR 2.000. Italian consumers became extremely cautious in their  
spending decisions, with consumption stagnating in the last three  
quarters of 2018, as well as in their investment decisions, increasing  
the share of wealth invested on deposits, pension and insurance  
2004 2006 2008 2010 2012 2014 2016 2018  
Source: Istat  
declining for the last one year and a half, falling to the lowest level  
since the beginning of 2015. Investment continued to suffer a  
disappointing evolution, remaining almost 20 percentage points  
below the 2008 level.  
During the second half of 2018, economic and financial conditions of  
Italian firms slightly worsened, with profitability newly declining.  
Despite value added of non-financial corporations rose above EUR  
A challenging fiscal balance  
00 billion, the highest value in the last twenty years, the gross  
The Italian Government has approved the 2019 Economic and  
Financial Document. Higher public investment, the new income  
support scheme, the revision of the pension system and all the other  
measures approved or under discussion are estimated to have an  
operating surplus to value added ratio fell below 42%. The  
persisting uncertainty surrounding the overall economic scenario  
negatively impacted on business confidence, which has been  
EcoPerspectives // 2nd quarter 2019  
overall positive effect on the economy, with an additional growth of  
3- Working age population  
0.1%. In 2019, real GDP would grow by 0.2%, from +1% expected  
in the December 2018 Budget Law, while employment would  
decline by 0.2% and the unemployment rate would increase to 11%.  
The structural deficit is estimated to rise to 1.5%, from 1.4% in 2018,  
and the debt to GDP ratio would reach 132.6%.  
15-64 year, as a % of total  
The population is declining…  
The financial crisis and the global recession that hit the world  
economy more than ten years now have produced long-lasting  
economic and demographic damages, through their impact on  
fertility and migration. The high levels of unemployment, which in  
many countries have characterized the years after 2008, have  
brought many couples to postpone pregnancies, so causing a  
higher than expected slowdown in the fertility rates. In Europe the  
effect of the global recession on fertility was particularly evident in  
Spain, Greece and Italy.  
950 1965 1980 1995 2010 2025 2040 2055 2070 2085 2100  
Source: Istat  
According to Istat, at the beginning of 2019, 60.4 million people  
were resident in Italy, a value that went down for the fourth  
consecutive year. Today the number of children per woman in Italy  
stands at 1.32, with values higher than the average in the Northern  
regions (around 1.37) and lower in the Southern ones (1.29 on  
average, with the lowest values in Basilicata, Molise and Sardinia,  
where the number of children per woman is close to unity). 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,  
from 66.5 years in 1950-55 to 83.26 in 2015-20, one of the highest  
values in the world, after those of Japan (84,0 years), Switzerland  
of the 2000s. The impact of the employment rate on growth was  
positive especially in the second half of the twentieth century, while  
the so-called “demographic dividend” (population in working age on  
the total), after having contributed in an important way to growth  
during the 1980s, since the early 1990s has become irrelevant.  
A complicated future  
According to recent Istat forecasts, Italy will see a gradual reduction  
in the number of “fertile age” cohorts (14-50) in the coming years,  
and an increase in elderly cohorts (over 65) which would lead to an  
increase in life expectancy at birth of male and female to 86.1 and  
83.56), Spain (83.36).  
90.2 years respectively by 2065. By 2025 the population should  
remain stable, while it will suffer a substantial decline by 2045, when  
there would be 59 million residents, which would drop by a further  
4.5 million (to 54.1) in 2065.  
… while life expectancy is growing  
In turn, the increase in life expectancy has led to a significant  
increase in the proportion of the elderly people: the over-65 years  
old, in particular, that represented just 8.1% of the total Italian  
population in 1950, in 2019 cover up to 22.8%. In the same period,  
the weight of the 0-14-year-old class declined from 26.7 to 13.2%.  
According to some estimates by Istat and the Bank of Italy the old  
age dependency ratio (i.e. the ratio between the over-65s and the  
population between 20-64 years old) increased from 14.3% in 1950  
to 37.8% in 2015 (last year available for international comparisons),  
the highest value in the world after that of Japan (46.2%). During the  
same period, the share of the working age population out of total,  
after having reached the maximum of 70% in the early 1980s,  
began to shrink, and according to recent forecasts it is expected to  
fall to a record low of 52.3% in 2050.  
By 2025 the population in working age in Italy would fall to 63.2% of  
the total, from 64% in 2019. A drastic drop is expected by 2045  
when working age population would be little more than half of the  
total (54.5%); the average age at that point would be close to 50  
years. About one out of three residents in Italy in 2045 will be over  
65 years old.  
Paolo Ciocca  
Due to these trends, the contribution of demography to Italian  
economic growth over the past 25 years has been negative. This  
can be seen by breaking down the per capita income into the  
product of three factors; product per person employed, employment  
rate and ratio between population in working age and total  
population. According to an estimate based on long time series  
between 1861 and 2016, in Italy, the most significant stimulus to the  
growth of per capita income came from productivity, especially  
during the 1950s and 1960s. The contribution of this variable  
became less relevant  and basically zeroed  since the beginning  
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