Italy is in recession. For the second quarter in a row its GDP level dropped. It decreased by -0.4% at annual rate in the first quarter and by -0.8% during spring. Carry over growth is now negative at -0.3%. To have a flat GDP growth on average for 2014, GDP has to grow by 1.4% for the third and for the fourth quarter. GDP growth will probably be negative for the whole year.

The first chart shows the Italian GDP from 2000 to the second quarter of 2014. It’s the GDP level (purple line) at constant price. I have calculated a trend (in red) from 2000 to 2008. It represents the GDP momentum before the crisis.

Three things to notice

1 – The GDP level is back to its 2000 level.

2 – Since the beginning of the crisis in 2008 the recession seen at the beginning of 2014 is the third.

3 – The divergence with the pre-crisis trend is spectacular. In Q2 2014 the gap is at 15%. The GDP level is 15 % lower than the level it would have had in following the trend.

As the Italian GDP is back to its 2000 level, it could be interesting to make a comparison with the other large countries in Europe and the US. That’s what is shown on the second chart.

Since 2000, two countries are back to this level or almost. This is Italy and Portugal. All the other countries have had stronger performances. In this ranking the USA, the United Kingdom and Spain are robust. Spain which has had a dramatic downturn since 2008 is still well above its 2000 level. A comparison is often made between Italy and Spain on interest rates profiles. We see in this chart that the two countries have had divergent trajectories on the real economy. We also see that UK performance before the crisis was spectacular and France and Germany do not compare to its momentum over the period.

At this scale of time we see that the German trajectory is above France’s only since the beginning of 2014. In other words, from 2000 to 2013 the French performance was stronger than German’s one.

On the first chart it was noticed that the GDP trend growth was 1.2%. By making the hypothesis that GDP growth rate is back to this number, how many time would it take to converge to its pre-crisis level?

In this very simple projection, it will take 8 years (2022) for the GDP to go back to its pre-crisis level. But probably the growth hypothesis of 1.2% is too strong. A 0.5% hypothesis would lead to a convergence in 2032.

The last chart takes the GDP per capita as starting point. Without data on population in 2014 I have used annual data until 2013. The GDP per capital level in 2013 is more than 10% below 2007. With this metric, the 2013 level is back to 1998. I have calculated a trend growth rate from 2000 to 2007 and have done a projection from 2013 to the year of convergence to its 2007 level.

With the pre-crisis growth rate it will take 14 years for GDP per capita to converge to its 2007 level (2028). Again, the pre-crisis growth rate used for this projection is probably too optimistic.

As I mentioned it in the two projections, former growth rates are probably to high. This comes from low productive investment that has lower potential growth but it comes also from the aging pattern of the Italian population. The chart below shows the projection made by the Italian institute of statistics.

What is important to notice is that the demographic adjustment has already started. The share of people who works is rapidly diminishing. From 2011 to 2022 (the convergence of my first projection) it will decrease by 2%. At the same time, the share of people above 65 will increase by 3%. At the 2028 horizon (my second projection), the impact is much stronger. This will weigh on productivity and on GDP momentum. That’s why the former growth rates are probably not sustainable in the mid-term. The adjustment will be longer than 2022 and 2028.

Recently Shinzo Abe spoke of replacing people by robots in order to improve productivity and to maintain the standard of living of the Japanese population. May be is it also the solution for the Italian economy?

Pingback: Four Graphs on the Euro Area Growth Momentum | Philippe Waechter's blog