For the sixth consecutive quarter, the contribution of internal demand to the growth of the Italian economy was negative, by almost one percentage point. Of this point subtracted from growth, public expenditure explains 0,1%, investments 0,2%, while, between July and September, the negative contribution of private consumption was equal to 0,6%.
Looking at the performance of the individual components of the product, one is struck by the weakness which affects Italian household spending with particular severity. In the 1992-93 recession, the contraction in consumption reached 3,7%, in 2008-09 it stopped at 2,5%, while in the third quarter of the current year it approached 5%.
The sharp drop in private spending is the result of the worsening of the general conditions of Italian households, with the deterioration of the labor market and the consequent loss of purchasing power. However, consumption is also affected by the significant deterioration in the climate of confidence, which appears even more intense than imaginable given the general context. In the last nine months, the consumer confidence index has lost more than 10 points, stabilizing at the lowest levels since 1996.
The worsening climate of confidence and the persistent tensions on the economic situation of Italian households signal the risk of a further decline in private spending. On average in 2012, consumption could fall by around 4%. This would be the largest drop since the Second World War, when, given the extraordinary nature of the situation, consumption in Italy fell at rates that even reached 40% per year.
The weakness of consumption is holding back growth in Italy
The data recently published by Istat confirmed what had already emerged in the past months: the current recession, less intense but longer than the previous one, has its origins in the weakness of domestic demand, which affects business investments, but affects with particular severity household consumption.
The contribution to economic growth from net foreign demand remained positive, mainly as a result of the decline in imports. Between July and September, exports increased by 0,5% compared to the previous quarter, while imports fell by 1,4%. However, the slowdown in exports is evident. In the first nine months of 2012, the average quarterly growth was +0,4%, half that recorded in 2011 and about one eighth of that recorded in 2010.
For the sixth consecutive quarter, the contribution of domestic demand net of inventories was, however, a negative result, by almost one percentage point. Of this point subtracted from growth, public expenditure explains 0,1%, investments 0,2%, while the negative contribution of private consumption was equal to 0,6%. Between July and September, Italian household spending fell by 1% in real terms compared with the previous three months. The decrease in investments was equal to 1,4%. Excluding price changes, consumption returned to 2000 values, twelve years behind, investments fell to 1997 levels, fifteen years behind.
Although at a first reading of the data the decline in investments appears wider, placing what is happening to the components of GDP over a long-term horizon, what is most striking is the weakness affecting household spending. In the case of investments, declines greater than the current ones have, in fact, been recorded in all the most recent recessions. In 1993 the decline in investments stopped just under 13%, while in 2009 it had approached 14%, compared with the -9,8% recorded between July and September of this year.
The historical comparison for consumption is different. In 2009, the decline in household spending had reached its lowest point in the first part of the year, with a year-on-year drop of 2,5%. In the 1992-93 recession the contraction reached 3,7%, while between July and September of this year on an annual basis the decline approached 5%.
Consumers increasingly disheartened
The sharp drop in consumption is undoubtedly the result of the worsening of the general conditions of Italian families. First of all, the deterioration of the labor market weighs, with the consequent loss in terms of disposable income. The unemployment rate has exceeded 11%. The number of employed people, although in recent months has stabilized at values below 23 million, remains over 600 thousand units below the maximum reached in the months preceding the start of the recession. A particularly disappointing salary dynamic must be added to an employment rate which remains at low levels. In the first ten months of the year, hourly wages grew by 1,5%, less than half the increase affecting the inflation rate.
As a consequence, the purchasing power of Italian consumers continues to decline. After falling between 2007 and 2011 by around 5 percentage points, according to estimates by the Bank of Italy, real disposable income this year is expected to record a greater decline than in 2009, when it fell by 2,5%. At the end of 2012, Italian families would therefore have lost more than 8 percentage points of purchasing power compared to the years preceding the crisis.
In addition, a rather precarious income situation is accompanied by a financial condition that has become complex. Between the second quarter of 2012 and the corresponding period of the previous year, the financial wealth of Italian families fell by more than 2%, with a loss in value close to 100 billion euro.
In addition to the income and equity aspects, however, consumption is also affected by a significant deterioration in confidence, which appears even more intense than imaginable given the general context just described. Assuming 2007 as the reference base equal to 100, consumption has lost about 5 percentage points, a decline close to 60% of that experienced by real income, but equal to only a third of that recorded by trust.
The deterioration in consumer confidence appears even more evident by comparing the trend of recent months with what happened in the past.
During the previous recession, confidence deteriorated less sharply. The decline in the index had started before Italy entered the recession, and the trough was reached while the economy was still continuing its contraction phase. In just over a year, from March 2007 to July 2008, confidence had lost 15,5 points, going from 108,3 to 92,8. After fully recovering, the index began to decline again, first gradually, and then recorded a sharp drop. In the last nine months, confidence has lost more than 10 points, stabilizing at the lowest levels since 1996. Such a significant decline was only recorded in 2002.
The particularity of the current situation of Italian families appears clearly in comparison with what is happening in the business sector. Obviously, the confidence in the manufacturing sector is also being affected by the general economic conditions, but the deterioration appears to be less intense. In November, the confidence index remained substantially stable at around 88, a value around 15 points lower than the maximum reached in April of last year, but almost 20 points higher than the minimum reached during the previous recession. The corporate sector, perhaps benefiting from an international context that presents a still growing demand, seems to suffer less intensely from the worsening of the general economic conditions.
Consumers with low confidence looking for work
The deterioration in consumer confidence affects all components of the index, albeit with different intensities.
First of all, a full awareness of the difficult conditions affecting our country emerges. In recent months, assessments of Italy's economic situation have remained stable at values in line with the lows of the last 15 years, reached during the previous recession. The assessments of Italian consumers, however, show above all a profound uncertainty about the future prospects for our country. Expectations on Italy's economic situation remain at historically low levels.
Furthermore, reading the index clearly shows the great concern of Italian consumers for the economic situation of their families. Both assessments of current conditions and expectations of future developments have dropped rapidly in recent months, reaching their lowest levels since 1996, values well below the levels reached during the previous recession. The opinion on the family budget has also deteriorated rapidly, losing almost thirty points in one year.
A confirmation of the peculiarity of the current situation also emerges from the comparison between the trend of the confidence index and the evolution of the conditions of the labor market. In recent months, the deterioration in the climate of confidence has been accompanied by a sharp drop in the number of inactive people. This relationship appears in contrast to what normally occurs. In fact, an improvement in economic conditions is generally accompanied by an improvement in confidence and better expectations for the future, leading those who until then had remained outside the labor market to enter it to look for a job. On the contrary, the greater lack of confidence in the improvement of economic conditions normally leads people to abandon the labor market, entering into inactivity, given the difficulty in finding a new job. In this period, exactly the opposite has happened.
More and more disheartened people enter the job market, coming out of inactivity, but, given the criticality of the economic conditions, they enter unemployment. This process has affected over 600 thousand people in the last year. Between October 2011 and October 2012, the number of inactive people decreased by 611, while that of the unemployed increased by 644. The increase in the unemployment rate experienced in the last year is therefore almost entirely explained by this phenomenon. Without the passage of 600 people from inactivity on the labor market, the unemployment rate would have remained substantially unchanged at the levels below 9% recorded at the end of last year. The reasons behind this radical change in people's behavior lie precisely in the worsening of the economic and financial conditions of Italian families. The reduction of incomes and the loss of wealth pushes many people to enter the labor market, as they can no longer afford to remain inactive.
The significant deterioration in the climate of confidence, together with the persistent worsening of the economic and financial situation of Italian households, signals the risk of a further decline in private spending. On average in 2012, consumption could fall by around 4%. To find a wider drop in Italian household spending, we need to go back to the years of the Second World War, when, given the extraordinary nature of the situation, consumption fell at rates that even reached 40% per annum.
