Better growth than forecast, but if we want to grow in competitiveness we must run faster than the others, not faster than yesterday

We are improving and growing more than yesterday. And this is positive. But compared with other European countries, remaining behind and growing less than others means continuing to drop behind, even within a growth context.

Better growth than forecast, but if we want to grow in competitiveness we must run faster than the others, not faster than yesterday

Growth is gaining strength

This can be seen and felt in various economic sectors and areas of the country, from north to south. But still at a speed lower than that of other countries in the Eurozone. In the second quarter of 2017, in the Eurozone, GDP grew by 0.6% compared with the first quarter of 2017, while in Italy it grew by only 0.4%. Compared with the second quarter of 2016, on the other hand, in the Eurozone, GDP grew by 2.2%, compared with 1.5% in Italy.

The increase in economic activity is positive, but if we want to move up, we have to run faster than the others, not just faster than we did yesterday. And, currently, we are running more slowly than the others.

The reasons why this happens—and has been happening for years—are many and varied. The main ones are low productivity, excessive bureaucratic red tape, limited acceptance of competition in professional and public services, high taxes, low efficiency of the judiciary system and high proportion of small- and medium-sized companies which, on average, have a lower capacity for investment in R&D than large companies.

To grow more, or at the same rate as others, it is essential that these nodes be taken on. Some government initiatives in recent years have taken steps in this direction, but we have not seen a true shift of gears. And many of the nodes have not been taken on.

As also stated in the recent newsletter of the Italian Ministry of Economy and Finance, we are treading a narrow path. Fiscal measures are necessary and urgent in a country whose public debt is one of the highest in the world and which, it must be noted, exposes Italy to external shocks that weaken it in the face of foreign economic trends. Fiscalmeasures that imply, essentially, either spending cuts or increase in taxes—or both. All other external conditions being equal, this translates into lower growth, at least in the short-term. And this is exactly what should not be done at the moment in which the recovery begins to intensify in a way that has not happened in recent years.

On the contrary, we must foster the recovery underway to allow its effects to spread throughout Italy and in the greatest number of economic sectors possible. Reducing public debt, consolidating the budget and not hindering growth: this is the major challenge the Italian government will be facing over the coming months.

In the “narrow path” we find ourselves, we have been able to obtain positive results, despite the fact they are contained and lower than nearly all other European countries.

Eurostat has certified that in the first quarter of 2017, Italy’s public debt decreased by 0.1% and is currently 134.7% of GDP, from 134.8% in the first quarter of 2016. A slight improvement and positive sign, but again with this indicator that is important for us, the speed of improvement is among the lowest in Europe. During the same period, Germany reduced its debt/GDP ratio by 4 percentage points (from 70.9% to 66.9%), Spain by 0.8 points (101.2% to 100.4%), Greece by 0.3 points (176.4% to 176.1%), the Netherlands by 4.7 points (64.3% to 59.6%), and Austria by 3.8 points (86.5% to 82.7%).

As indicated in previous articles, the context remains extremely positive and this favors Italy’s growth. Last year, Italian GDP finished +1%, the highest in the last 6 years. This year, the most recent estimates indicate that the country will close with a growth of 1.3%-1.5%, and an increase in domestic consumption and investment. The most recent figures regarding industrial output are positive and are around +1%. Industrial orders are up significantly, between 3% and 5%, depending on the sector.

Within this context, Ambrosetti Club indicators of sentiment regarding the current and prospective economic situation are at record levels and indicate an acceleration in the recovery, including in coming months.

Our indicators are developed on the basis of the results of a survey carried out with over 350 businessmen, CEOs and top management of leading Italian and multinational companies operating in Italy, who are Ambrosetti Club members. On a quarterly basis, we glean information regarding the view of the Italian business community about business in its respective sectors from a 360° perspective, on planned investment, sales trends and changes affecting the workforce.

Values above zero indicate that sentiment is positive with the forecast of an expansion in economic activity, whereas values below zero indicate that sentiment is negative and forecasts a contraction in economic activity.

Assessment of the current business situation

In September, the sentiment indicator regarding the current economic situation reached an all-time high of 38.5 points, up over 10 points from June levels. Businessmen and managers of our business community perceive an economic situation in which there is a strong recovery.

Leonardo Salcerini, CEO of Toyota Material Handling Italia, says that in recent months there has been a real boom in sales which, in some areas, have exceeded 2008 pre-crisis levels.

Expectations for the labor market over 6 months

In terms of employment, sentiment has taken a leap to 20.8, the highest since the beginning of the surveys and 15 points above the June figure.

Expectations for investments over 6 months

Investment continues its positive trend. The sentiment indicator for future investment, currently at 32.3, is near its all-time record.

The continued strengthening in investment is positive because, as our mantra states, “without investment there is no growth, without growth there are no jobs and without jobs there is no future”.

In general, our sentiment indicators point to a probable strengthening of growth over the coming months. Will it be enough to bring us into line with the levels of growth in other European countries?

This challenge is anything but straight-forward, given that, in the meantime, we must continue to consolidate the budget and the government must balance stimuli against a rigorous approach to public spending. The required maneuver, although slight, will necessarily further reduce the deficit, but also have a restrictive impact on growth.

As underscored in the previous article, the strength of exports and the manufacturing sector are not sufficient on their own to guarantee growth at a level with other European countries. Tourism could provide a boost which, according to the most recent surveys, is on its way towards a record year in terms of overnight stays and arrivals.

However, on a structural level we must work on productivity and unemployment through policies that reduce the north-south gap and promote consumption throughout the country, as well as growth in those sectors, such as construction, which have remained behind.

Initiatives on a system-wide level are needed, and we must be able to activate the greatest number of stimuli.

One of these stimuli is, for example, the digitalization of the public administration in order to increase productivity and efficiency, including through the insertion of new and young competencies. In government offices, the percentage of people over 55 years of age is among the highest in the world, and over 20 percentage points above the OECD average. In Italy, it is at 45.4%, while the average for OECD countries is 24.9%. Recently, the Italian government launched a 3-year plan for the digitalization of the public administration, the goal of which is to promote investment in technology in the public sector so that the PA will be in a position to provide services in an increasingly faster, simpler and more transparent manner. It is a road to be traveled with rigor and commitment as a fundamental element in allowing Italy to bring itself into line with the growth experienced by others.

We are improving and growing more than yesterday. And this is positive. But compared with other European countries, remaining behind and growing less than others means continuing to drop behind, even within a growth context.

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