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Daniele Fraietta

Italian Economy Stagnates as Long-Term Growth Potential Falters

by Daniele Fraietta | Dun & Bradstreet Editor

May 26, 2015 | No Comments »

Italy-map_1100px“The car has finally restarted,” bragged Italian Prime Minister Mateo Renzi earlier this month while reporting on the addition of nearly 320,000 new jobs in first quarter 2015. However, the country’s engine still seems to be missing a couple of cylinders: An average of two companies per hour closed in the first five months of the year, according to a recent report from Cribis, Dun and Bradstreet’s World Wide Network partner in Italy.

Although the total number of bankruptcies has stopped rising, Cribis’ data indicates there is still significant downward pressure on Italy’s economy.

Cribis’ figures also show that the economic divide has not narrowed between the North and South. In terms of growth and internal demand for goods, Italy’s northeastern region is still the most reliable geographic area, with 45.6% of on-time payments and only 8.8% of payments over 30 days. In contrast, only 22.4% of companies in the southern region are good payers, and 27.3% are extremely late payers.

Why is Italy still struggling? Or, to put it more bluntly, why isn’t Italy growing? To provide answers to these questions, a closer, deeper look at the country’s economy is required.

First, it’s important to understand that Italy stopped growing long before the recent financial crisis. While short-term growth is driven by changes in demand due to consumer confidence or other changes, long-term growth is largely determined by factors such as technology, demographics, and the education system.

Research from the Bank of Italy reveals that the proportion of GDP spent on R&D is lower in Italy than in the leading European countries: 1.3% of GDP compared to an average 2.4% in countries in the Organisation of Economic Co-operation and Development (OECD) and 2.1% in the Euro area. Furthermore, Italy is significantly behind other European countries in updating regulations governing new business, information and communications technology (ICT) infrastructure, and financial methods to support innovation. Italian firms stand out for low level of inputs, especially the ratio of R&D expenditure and the number of college graduates.

As Italy struggles to grow, the returns on education continue to weaken, compromising future growth. World Bank indicators suggest that Italian education levels are low because returns on education are relatively low in the country. In addition, government spending on education in Italy (8% of total government expenditures) is also relatively low when compared to other members of the OECD (12%) and the Euro area (11.6%).

Finally, labor input — a key driver of long-term growth — is expected to decline because of Italy’s demographic profile. The country’s working-age population is expected to shrink, changing the country’s population profile significantly. The number of people over 65 years of age will likely increase by half by 2050, while the share of the working population (ages 15-64) is forecast to fall to 53% of the total population — down from around 60% currently.

This will lead to a rising dependency ratio, which in turn will place an increasing burden on state resources. Furthermore, with an ever declining share of young citizens, who are also the most technologically dynamic, the demographic trend is aggravated by extremely high youth unemployment (43% in first quarter 2015). Indeed, increasing numbers of young, educated Italians are leaving the country to look for job opportunities elsewhere.

Overall, Italy seems to have fallen into a vicious cycle. Its stagnant economy reflects poor innovation and education attainments. But unless economic prospects improve substantially, incentives to invest in education and innovation will remain weak. All of this is exacerbated by an aging population.

How to end this cycle and put Italy on a stable path to self-sustaining long-term growth is the main policy challenge facing Italian authorities in the years ahead.

Daniele Fraietta has been a D&B economist for more than two years. He currently covers some Western European countries, notably Italy, Greece, Spain, and Ireland. For D&B, Daniele has also developed the new econometric framework for commodity prices and exchange rates forecasting. He has an MSc in Economics from the University of Rome Tor Vergata, a Master in Business Administration from The Polytechnic University of Milan, and a Master in International Business from the Chapman College of Business.


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