Standard & Poor's recently published a pessimistic report on the Italian recovery. In particular, the rating agency expects that, despite the invigorating effects exerted on the economies of the Eurozone by the depreciation of the euro, the fall in oil prices and the start of QE by the ECB, the Italian recovery will be slower than that of the other major EU countries. According to S&P, the comparison between the dynamics of consumption and exports between Spain and Italy would be particularly relevant: consumption grew in the Iberian country by 3,5% against 0,8% in Italy; exports increase by 6% in Spain against 4% in Italy.
One wonders whether the pessimism of S&P is justified or whether it is the result of a prejudice, perhaps a sort of extrapolation of the Bel Paese's past growth difficulties. In our view, there are good reasons to believe that S&P's pessimism about the Italian recovery is exaggerated.
The most important consideration is that it is very difficult to predict how a country's macroeconomic dynamics will respond to major reforms. Take labor market reform. Albeit with significant differences, the Italian Jobs Act of 2015 is inspired by the Hartz Act, the reform of the labor market introduced in Germany in 2003. Well, if we compare the difference between forecasts of GDP growth formulated (in April of the year of reference) and growth actually achieved during the year (in both cases, data from the IMF), something interesting can be noted.
Figure 1 shows us that between 1998 and 2003 forecast errors were on average negative in both Germany and Italy, ie there was a tendency to forecast more growth than would actually be achieved. The situation changed after the Hartz Act (the first vertical black line): while forecast errors continued to be generally negative in Italy, they became predominantly positive in Germany and remained so even after the outbreak of the global crisis. It is therefore legitimate to ask whether even in Italy after the Jobs Act (the second vertical line) growth will be able to exceed that expected. It is too early to tell but the only available observation, the one referring to 2015, gives us a 1% growth in Italian GDP, double what was forecast by the IMF last April.
Furthermore, focusing, as S&P does, only on the dynamics of consumption and exports can be misleading in the comparison between Italy and Spain. For example, the unemployment rate in Spain is still at 22,4% against 12,0% in Italy and this will negatively affect the growth of domestic demand in the Iberian country.
And again, it is worth remembering that S&P (with the other primary rating agencies) has made so many errors with its own ratings that its ability to forecast is called into question. Suffice it to recall a few cases: failure to warn investors in 1997 about the incipient Asian crisis, in 2001-02 maintenance of too high ratings for many companies that soon turned out to be "drums" (e.g. Enron in the USA and Parmalat in Italy), in 2007- 08 downgrading of Lehman Brothers only when the bank failed and structured finance products (often linked to subprime mortgages) only after the crisis had already started … and it could continue. If S&P made such mistakes in its original business of issuing ratings, can we assume that its macroeconomic forecasting models are any more reliable?
Finally, the growth of a country - and also the dynamics of its consumption, the main component of aggregate demand - also depends on the fiscal policies implemented. From this point of view, Spain has been allowed to maintain much more expansive policies than in Italy: the public deficit of the Iberian country was close to 10% between 2010 and 2013 (4% in Italy), 6,8 % in 2014 (2,9% in Italy) and 5,8% in 2015 (3% in Italy). In these circumstances, the most important judgment is that of the markets that make debtors deemed riskier pay more, because perhaps they grow but in an unsustainable way.
Well, compared to a year ago, the interest rate paid by the Italian government on ten-year BTPs fell by more than 60 basis points (0,6 percentage points), while that on ten-year Spanish Bonos fell by less than 20 points basis. Thus, the gap between Spanish and Italian rates, around -30 basis points a year ago, became positive by around +20 basis points, i.e. Spain pays a little more than Italy despite the fact that S&P gives the Spanish country a rating of BBB and the Bel Paese one notch less (BBB-). Finally, in the days following the publication of the S&P report, the gap between Bonos and BTPs widened slightly to +25 basis points. And this without considering the possible impact of any electoral success of the Catalan secessionists. In short, it seems that the markets did not believe the Standard & Poor's report.
