Households in Italy, the country at the heart of the euro zone crisis, have responded to the nation’s bleak outlook by cutting their spending for the first time in two years.
The figures underline the fierce headwinds Italy will face in 2012 as it tries to pull itself out of its debt crisis. Italian political leaders are hoping that despite sharp cutbacks in government outlays, the country will be saved from a severe recession through relatively steady spending by Italian households, since their personal debt is far below the European average. A deep recession would worsen the debt crisis by reducing tax revenues.
But Wednesday’s numbers, which cover the third quarter of this year, suggest that ordinary Italians have already reacted to the turbulence in Italy’s economic and political system by reining in their spending. Household consumption fell by 0.2 percent, according to Italy’s national statistics agency—the first quarter-on-quarter decline since 2009. Ben May, a European specialist at Capital Economics in London, said, “The domestic economy is suffering.” He added, “Given that three rounds of austerity measures have been announced by the government since the summer in a bid to sharply reduce the budget deficit next year, spending looks set to fall further.”
The figures also showed that Italy’s overall output shrank by a higher-than-expected 0.2 percent in the third quarter. When combined with recent figures suggesting a continued fall in Italian economic activity, Wednesday’s numbers indicate that as the year closes, Italy is already stuck in a recession—most commonly defined as two consecutive quarters of declining output.
Government austerity measures, including public-sector redundancies and tax increases, are likely to hit Italian households’ spending by reducing disposable income and adding to a sense of economic insecurity. One possible response of Italians to cuts in their income is to add to their personal debt. In sharp contrast to Italian government debt, it is low. At 40 percent of annual gross domestic product, it is far below the European average of about 75 percent.
However, the third-quarter figures suggest that Italian consumers have not been doing this. Instead, they have already responded to the country’s uncertain outlook by economizing even before government parsimony fully kicked in. Government spending fell by 0.1 percent in the third quarter—merely a tiny foretaste of what is to come.
One bright spot amid the gloomy figures came from Italy’s exports, which surged by 1.6 percent. However, such growth is unlikely to last given recent surveys suggesting the euro zone economy as a whole—the biggest destination for Italian exports—has been shrinking since September.
Confindustria, Italy’s chief employers’ organisation, predicted last week that the country’s economy would shrink by 1.6 percent in 2012—signifying a deep recession. However, it made clear that if Italian government long-dated bond yields failed to retreat below 5 percent next year, the fall could be higher.
The yield on benchmark Italian 10-years was considerably above this level as European trading closed on Wednesday—at 6.82 percent, it was up 16 basis points on the day. If the government is forced to continue paying such rates to borrow, it will have to cut spending and raise taxes even further to reduce its deficit—exacerbating the recession.
However, the Italian economy at least performed better than Ireland’s during the same period. Gross domestic product in the Republic slumped by 1.9 percent in the third quarter, according to recent figures—hit by the impact of government cutbacks, which are much further advanced than in Italy.
Despite the continuing gloom about Italy’s future, optimists argue that its financial situation has recently been stabilized through heavy buying of Italian sovereign bonds by the European Central Bank. When Italian 10-year yields broke above 7 percent in November, many analysts warned that rates were likely to escalate rapidly out of control. But this has not happened: although 10-years have traded at above 7 percent for much of the past month, they have rarely risen far above this.
The ECB provided further support to the European financial system as a whole on Wednesday by offering three-year loans to banks in the euro zone including Italy. Over 500 banks borrowed €489 billion—even more than the massive €300 billion or so which analysts had forecasted.
