contesto di crisi internazionale. E l Italia?

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1 Mercati finanziari, i i economia reale e politiche economiche nel contesto di crisi internazionale. E l Italia? Analysis Meeting Lorenzo oe ocodogno o Milan, January 19, 2009 Italy s Ministry of the Economy and Finance (MEF) Department of the Treasury, Economic and Financial Analysis and Planning Directorate 1 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

2 Trasmission channels and critical issues n Housing market n Wealth effects n Credit crunch n Confidence n Foreign trade n Oil prices and the euro n Labour market n Productivity and structural issues n Fiscal sustainability 2 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

3 HOUSING MARKET Moderate house price growth vs. other countries Source: OECD Italy France Germany Spain UK US Japan Over the period , house prices grew fast in most advanced countries (excluding Germany and Japan). Growth has been much faster in Spain, France and the UK than in Italy, where sharp adjustments seem unlikely. 3 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

4 HOUSING MARKET The construction cycle has turned % year-on-year Investimenti in construction, % y-o-y -8.0 Fonte: ISTAT and EC EC construction confidence indicator (RHS) Q Q Q Q Q Q Q Q Q Q Q The construction cycle has moderated long ago and construction confidence has declined since 2Q07. The downturn seems unlikely to repeat, although near-term contraction will probably be significant. 4 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

5 HOUSING MARKET The construction sector is not oversized Weight of construction sector over total activity in Italy ( ) Investment in construction/gdp (%) 11,47 11,03 9,61 9,51 10,47 Contribution of construction to growth (pp) 0,00 0,06-0,02 0,08 0,02 Source: Datastream The share of the construction sector over total economic activity has not increased significantly over the years. Even in , the contribution to GDP growth was modest. A negative contribution was recorded in MEF, Department of the Treasury, Economic and Financial Analysis and Planning

6 HOUSING MARKET Housing sector demand and business cycle Share of output variation explained by housing demand shocks Italy US UK Germany Sorce: IMF (weo, April 2008) The share of output explained by housing demand in , although significant by international comparison, decreased considerably versus The housing sector has not been a main driver of the business cycleinitaly. 6 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

7 WEALTH EFFECTS Less vulnerable to a downturn in housing wealth In Italy, the marginal propensity to consume out of housing wealth is slightly negative and weak by international comparison. This is partly due to the limited development of the mortgage market and scarce opportunity to use housing wealth as collateral. Thus, risks for Italy's private consumption via lower real wealth seem to be contained. 7 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

8 WEALTH EFFECTS as the marginal propensity to consume is flat Italy US UK Germany 0, Marginal propensity p to consume out of housing wealth (0.02)* Mortgage Market index , Source: IMF, WEO (April 2008) * Muzzicato, Sabbatini, Zollini, (Bank of Italy), "Prices of residential properties in Italy: constructing a new indicator" 8 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

9 WEALTH EFFECTS Consumers are vulnerable to swings in financial wealth n According to the BoI, Italy s marginal propensity to consume out of financial wealth (about 6%) is in line with that in Anglo- Saxon countries. n In 2Q08, Italy s total financial wealth declined a bit more than in other countries: Financial wealth year on year percentage change in 2008Q2 Italy France Germany UK Currency and deposits Bonds and securities Shares and other equity Mutual fund shares Insurance technical reserves and others Total financial wealth Source: Prometeia 9 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

10 CREDIT CRUNCH Moderation but no collapse for now in credit to firms 20.0 Up to 1 year From 1 to 5 years Over 5 years Loans to NFCs - Total 15.0 year-on-year % Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Source: Bank of Italy Total credit to non-financial firms moderated from 14.5% yoy in October 2007 to 6.0% in November Short- and medium-term credit declined markedly recently. 10 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

11 CREDIT CRUNCH although survey evidence is more worrying EA demand IT demand EA supply IT supply Factors affecting net tightening in Italy in 3Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q costs market funding capability bank competition economic expectations risks tied to risks on securities specific sectors In 3Q08 tightening in credit standards for firms was stronger for Italy than for the Euro area. Firms demand for credit rose in Italy while it declined in the Euro area. Risks related to general economic activity and specific sectors were the two main factors affecting net tightening (and gaining importance over time). 11 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

12 CREDIT CRUNCH Consumer credit and mortgages have weakened as well Consumer credit Lending for house purchase year-on n-year % chang ge Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Source: Bank of Italy The yoy change in loans to households turned negative in November 2008, pushed down by the contraction in mortgages. Growth in consumer credit, which accounts for only a small fraction of total credit, was still positive although decelerating. 12 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

13 BANK LENDING TO HOUSEHOLDS Credit to households Mortgage loans Consumer credit IT demand EA demand IT supply EA supply EUd demand d IT demand d EA supply IT supply Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Some tightening in credit standards to households is underway for both mortgages and consumer credit, in Italy and in the Euro Area. In Italy, demand for mortgage loans has declined over the past few quarters, while demand for consumer credit has increased. 13 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

14 CREDIT CRUNCH Bad loans remain low 15.0 Loans to households (LHS) Bad loans over total loans to households (RHS) year-on- -year % sha are in p.p Ja an-05 J ul-05 Ja an-06 J ul-06 Ja an-07 J ul-07 Ja an-08 J ul-08 Source: Bank of Italy Theshareof bad loans over total credit to households has dropped since mid MEF, Department of the Treasury, Economic and Financial Analysis and Planning

15 CREDIT CRUNCH What about Italy s banking system? According to the IMF, the pro-cyclicality of bank leverage in a country depends on the structure of the banking system and its role inside the financial system ( arm s (armslength or relation-based system ). On historical basis, downturns following financial stress tend to be deeper and more prolonged the higher the pro-cyclicality of bank leverage and household and business indebtedness. The degree of financial innovation and level of bank and household indebtedness are lower in Italy. Hence, the negative impact of the financial crisis should be smaller and shorter than in other economies. Italy US UK Germany Arm's length Procyclicality of leverage Source: IMF, Weo (October 2008) 15 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

16 CREDIT CRUNCH Public liabilities to rise, although risks are contained for Italy Total: over of GDP in % AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK Public Debt Deposits Bank debt Sources: Eurostat, European Banking Federation 16 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

17 Index (lo ong-term avera age=100) CONFIDENCE Italy s business sentiment broadly in line with Eurozone s Consumer Confidence Indicator (ESI) EU-15 (long-term avg. =-12) Italy (long-term avg. =-14) Index Industrial Confidence Indicator (ESI) EU-15 (long-term avg.= -7) Italy (long-term avg.= -3) Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Source: European Commission Source: European Commission Note:The long-term average is considered since January Note:The long-term average is considered since January In December, consumer and industrial confidence declined to historical lows both in Italy and in the Euro area. Amongst major European countries, Italy recorded the second largest deterioration of ESI (-9.9 points) in December. 17 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

18 FOREIGN TRADE Ex-oil trade balance not deteriorating percentage e point of GDP Trade balance fob-cif, net of energy (LHS) Trade balance fob-cif (LHS) REER - Unit Labour Cost based* REER - prod. prices of manufactures* Index x, 1999= Source: Bank of Italy and MEF calculation on Istat data. *) An increase of the indicator means a loss in competitiveness. Net of energy the trade balance stabilised in recent years, and even improved in 2007, despite deteriorating competitiveness. The degree of the competitive loss is dependant upon the index chosen (a recent IMF WP underlines somewhat lower real appreciation for Italy, cp. WP/08/240). 18 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

19 FOREING TRADE Weaker impulse from external demand 11,5 9,5 7,5 1, ,10 1,05 % year-on-ye ear 5,5 3,5 15 1,5-0,5 1,00 0,95 0,90 Ind dex 2005=100-2,5 0,85-4,5 Q Q Q Q Q Q Q Q Net exports, contributions to GDP growth (LHS) Growth in Italy's foreing markets (LHS) Terms of trade (RHS) Growth in Italy s foreign markets has declined markedly over the past few quarters, while terms of trade have deteriorated. The contribution to GDP growth by net exports was almost flat in 3Q08 and may turn negative thereafter. 0,80 19 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

20 OIL PRICES AND THE EURO Weaker Euro and lower oil prices: more benefits for Italy Italy should benefit more than other countries from the recent depreciation of the Euro versus the main currencies. Given Italy s dependency on energy imports, the recent decline in oil prices may produce a larger beneficial effect on the Italian economy compared to that expected on other non-oil- producing countries. 20 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

21 OIL PRICES AND THE EURO Real disposable income to benefit Real disposable income (% change from baseline) Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 Interest rate Oil price Interest rate + oil price According to simulations, the oil price reduction is expected to play a key role in supporting real disposable income for six quarters ahead while lower interest rates (playing a more limited impact) are projected to mainly affect the first 3 quarters of MEF, Department of the Treasury, Economic and Financial Analysis and Planning

22 LABOUR MARKET Only some slowdown in employment growth for now Thousands Employment Unemployment rate (RHS) 9 8 % Q Q Q Q Q Q Q Q Source: ISTAT, LFS In 3Q08 labour force stagnated, employment decelerated and the unemployment rate was stable at 6.7% over the previous quarter (seasonally adjusted data). The increase in employment is due to strong growth in part-time ti contracts, t female and immigrant i work. 22 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

23 LABOUR MARKET but the outlook is worsening 5 Actual and expected employment- Manufacturing sector (SADJ) % yea ar-on-year Total employment (full-time equivalents) (LHS) Employment expectations 3 months ahead -balance (1) (RHS) Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4-20 Source: Our calculations based on ISAE and ISTAT data, Labor Force Survey (1) The balance is the percent of responses indicating rise less the percent indicating fall. Employment expectations have sharply worsened over recent months. 23 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

24 PRODUCTIVITY Labour productivity growth has continued to decline 6.0 Industry (excluding construction) Private Services Labour productivity (measured on GDP) 4.0 % yea ar-on-year Source: ISTAT Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 In 2008, labour productivity fell in line with the cyclical downturn. Low productivity growth remains one of most important structural challenges. 24 MEF, Department of the Treasury, Economic and Financial Analysis and Planning

25 PRODUCTIVITY with a clear deterioration over the past 10 years 5.0 tage annual aver rages, percent Industry (excluding construction) Construction Private services Whole economy Productivity has markedly weakened since the turn of the century in almost all economic sectors. Growth-accounting exercises underlined the negative role played by TFP in MEF, Department of the Treasury, Economic and Financial Analysis and Planning

26 STRUCTURAL ISSUES Growth versus the EU-15 in : 2006: the TFP issue GDP Demographic components Labour market components Labour Productivity Native Population Net Migration Italy's GDP grew on average by 0.9 p.p. per year less than the EU-15 average. The increase in the gap was mainly due to labour productivity and, to lesser extent, demographic components. Share of Working age Population Youth Participation Male Participation Female Participation Participation Unemployment Rate Average Hours Worked Capital Deepening Total Factor Productivity Initial education (Labour quality) -1,5-1 -0,5 0 0,5 1 While TFP made a positive contribution to growth in the EU-15, in Italy TFP recorded a contraction, reducing GDP growth by an annual average of 0.7 p.p.. Capital deepening rose, but at a slower rate than the EU-15 average. Some progress is shown on labour quality (initial level of education). The horizontal axis shows by how many percentage points each component contributed more/less to growth than in the EU MEF, Department of the Treasury, Economic and Financial Analysis and Planning

27 FISCAL SUSTAINABILITY Limited leeway for deficit spending Public Debt % of GDP Stability Programme 2008 scenario RPP 2009 scenario 27 MEF, Department of the Treasury, Economic and Financial Analysis and Planning