It is virtually impossible to talk about Italy’s fraught economy without addressing its deep-seated demographic problems. Everything that’s wrong with the Italian economy, from high public debt to bad banks, can be explained by studying its demography.
Before we touch on this in more detail, it’s worth looking at the latest news on Italy, which looks destined to roil through global markets in the days to come.
Well, just when it seemed as if the situation couldn’t get any worse in Italy, along came the International Monetary Fund (IMF) to further dampen sentiment.
With Italian banks making headlines in recent weeks for all the wrong reasons, the IMF has added fuel to the fire by slashing Italy’s growth prospects for 2016 and 2017. The IMF now expects GDP to grow by less than 1%, down on previous forecasts of 1.1%. The bank also revised its growth forecast for 2017, down from 1.25%.
Not surprisingly, Brexit was the culprit for the IMF’s revisions. Yet while the IMF cites Brexit as a reason behind the lowered forecasts, Italy has a litany of problems that have hindered economic growth since the 1990s. Its plights aren’t a new development, and Brexit would rank pretty low on a list of reasons for Italy’s systemically anaemic growth.
Never to shy away from turning bad news into outright fearmongering, the IMF hinted of even worse to come. According to the international lender, the Italian economy is currently in the middle of a two-decade-long recession.
The IMF forecasts that the Italian economy will only return to its 2008 peak by 2025. Meanwhile, other Eurozone economies are expected to grow by up to 25% from pre-crisis levels during this period.
The IMF reports:
‘The authorities thus face a monumental challenge. The recovery needs to be strengthened to reduce high unemployment faster and buffers need to be built, including by repairing strained bank balance sheets and decisively lowering the very high public debt.
‘Downside risks arise from delays in addressing bank asset quality, intensified global financial market volatility — including from Brexit, the global trade slowdown weighing on exports, and the refugee influx and security threats that could further complicate policymaking. If downside risks were to materialise, regional and global spillovers could be significant, given Italy’s systemic weight.’
What can be done about it? There is the usual IMF-endorsed prescription of painful reforms. But, beyond that, there is very little in the way of root and branch reforms.
What’s more, of the challenges identified by the IMF, ‘repairing strained bank balance sheets’ seems the only area where a quick fix is available. Put a few zeroes in the computer with a couple of keystrokes and, before you know it, distressed banks become slightly less distressed.
In any case, it’s hard to see how the Italian economy can shake its funk without the help of the banks, at least in the short term. But in order to do that, Italian banks would first need to sort out their own problems. That’s easier said than done, given that there are some €360 billion of bad loans weighing on the sector. On top of this, Italian bank shares have tumbled a staggering 50% in 2016. All told, the future looks drab for Italian banks. As the IMF bleakly noted: ‘Unless asset quality and profitability problems are addressed in a timely manner, lingering problems of weaker banks can eventually weigh on the rest of the system.’
What the IMF is saying is that public bailouts are the only thing that can help shore up balance sheets across the banking sector.
So, what does all this tell us about Italy?
For one, stagnant as it has been since the turn of the millennium, the Italian economy will remain rudderless. On top of this, Italian banks — which don’t have a proverbial pot to piss in — will require bailouts to remain solvent, if for no other reason than to keep the ruse going that little bit longer. In the meantime, living standards will decline, extremism will rise, and the ‘two-decade-long recession’ will more than likely race past its expiry date in 2025.
Because Italy can’t ever return to growth levels necessary to overturn its perilous position. It is not because of Brexit, or its banks, that it finds itself in this situation. It is because of the chart below. Everything you want to know about Italy, you’ll find in that chart. As it happens, it is also the single biggest indicator of why things won’t get any better in Italy, regardless of the measures policymakers enact to fight against the tide.
It’s the demography, stupid
Source: Index Mundi
The above, as you’re no doubt aware, is a population pyramid chart. It is a graphical representation of the age groups that combine to make up Italy’s 60 million-odd people, broken down into five-year age brackets.
As you can see, Italy’s demography resembles a Christmas tree, albeit one with some girth at its stem. In demography, however, a Christmas tree population pyramid is no cause for celebration. Quite the opposite, in fact.
The two largest age groups in Italy are those aged 40–44 and 45–49. Beneath these age brackets, every younger age group gets comparatively smaller than the one before it.
What this means is that there is a significant number of people who are heading into retirement over the next 20 years. Below them, the number of people who will have to support the ever-growing group of retirees falls well below requirement. Italy already has too many dependents, and ever-fewer contributors. Unfortunately, that’s a situation that looks set to worsen in the decades ahead.
In no uncertain terms, Italy’s inversed population pyramid is nothing short of disastrous.
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Why is Italy’s Demography a Problem?
Because, as the government comes under increasing pressure to meet the demands of pensions, and healthcare commitments in particular, it will have an ever-smaller pool of working-age people to support government spending through taxation. That creates the groundwork for excessively high taxation in Italy. When taxes become onerous, discretionary incomes stagnate and fall. When discretionary incomes fall, spending does too, hurting economic growth.
It is a death spiral from which there is little escape. In fact, there is no precedent of a nation recovering from a demographic shift like this anywhere in human history. However, this population time bomb isn’t unique to Italy; it afflicts much of the Western world. Either way, if we sit here, trying to come up with solutions to Italy’s economic problems, we run up against a brick wall. Ultimately, one point stands out above all: There is no way back to growth for a nation whose demographic makeup has the kind of imbalance that Italy’s does.
Italy’s only has two options here: start having a lot of children pronto; and take in as many immigrants as possible. However, neither of these is guaranteed to redress the imbalance anytime soon.
In the first instance, it takes up to 25 years for a child to become a productive member of society; provided there are jobs for him at the end of that journey…something Italy’s disaffected youth continue to grapple with.
Moreover, you have to convince an already financially stretched, urban population that it needs to have 2–3 children per family. Again, easier said than done, especially for a nation where the birth rate is at 1.4, well below the replacement level of 2.1.
As for taking on more migrants, that comes with its own pitfalls. The quality of migrant (that is, each migrant’s level of qualification and potential contribution to the economy) is important. It is not enough to just have more consumers running around.
Additionally, a nation has to have a tradition of embracing immigration. Italy doesn’t; not by a long shot. Without this, you get the kind of scenes that are, well, taking place in Europe as we speak. Italy, sitting at the southern edge of Europe, is often the first port of call for a large number of migrants seeking asylum from sub-Saharan Africa. Such migratory patterns have already caused a lot of tension within Italy. And they, in all likelihood, will lead to further civil unrest in the decades ahead.
Ultimately, the truth of the matter is that today might be as good as it gets for Italy. Europe as a whole is in the midst of a civilisational decay, which may take a century or longer to rebalance itself, if it ever does. What comes out of that is anyone’s guess, but the immediate future seems certain: In order for Italy to shake itself from its rut, it needs a wholesale demographic revitalisation.
High debt levels, bad banks, weak growth…all that is symptomatic of Italy’s demographic malaise. Only by fixing this root issue can Italy restore normality to its beleaguered economy. But there is no easy fix. It will be a long, hard road ahead for the Italians, with no certainty of a happy ending.
Contributor, Markets and Money