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Marcuard's Market update by GaveKal Dragonomics
Recession has become a way of life in Italy with 11 of the last 12 quarters seeing negative economic growth. The gloom was reinforced on Monday with the release of industrial orders for July showing a 0.7% YoY contraction. The sad thing for the one-time precocious catch-up kid of Europe’s post-war miracle has been Italy’s complete embrace of its dribbling dotage. Far from raging against the fading of its economic youth, Italy’s power elites have embraced their own decrepitude and tried to put the entire country on an around-the-world cruise without end.
Italy is not unique in facing tough demographics and difficult questions of inter-generational equity, but more than most it has skewed the playing field to favour the old, whether they be companies, civil servants or workplace talent. About a quarter of Italians between 15 and 29 are not in employment, education or training; the second highest level in the EU. The big hope for those who retain a pulse has been their 39 year old Prime Minister Matteo Renzi who has promised meaningful institutional reform. An important marker in this journey was Renzi’s introduction last Wednesday of a labour market reform bill.
The plan has already drawn full throated opposition from trade unions and the left side of Renzi’s party, inevitably sparking angry protest from those threatened by job losses, while beneficiaries cannot easily be identified. Renzi kicked off his initiative somewhat tentatively in the summer by making it easier for firms to employ workers on temporary contracts. The new law would adopt a graduated scale of protections so that new hires do not get the same rights of near untouchability from firing. These may not be game-changing reforms, but they are an important step to shaking up the job market.
Such moves are needed to boost Italy’s competitiveness as unit labour costs are 8% higher than in 2008. Despite recession conditions, real wages still managed to climb in 1Q14 compared with a year earlier. By contrast, unit labour costs in Spain, Ireland, Portugal and Greece have, since 2008, fallen by a respective 6%, 11%, 1% and 10%.
The impact of having so many workplace untouchables is that youthful energy and creativity is impeded and with it productivity growth. In the last five years 131,000 Italians have registered to work in the UK alone, triple the level of 2001-06. Italians have given up the idea of working at home; labour market participation is the lowest in the EU at just 63.9%, compared to an average of 72.1%. The picture is especially skewed for women with a 52.6% participation rate.
Renzi may not have tackled the unions head-on, but he is pushing legislation, that if passed, would make it easier to hire and fire. This offers an encouraging signal of intent. It is also the kind of move that Renzi will hope wins him scope for fiscal flexibility when EU leaders meet on October 8.
