The Italian Economy: Will Draghi make the difference?

Italy has been in a difficult economic situation for many years. The pandemic made the economic and social problems even worse. Nevertheless, I am optimistic for Italy and the Italian economy. Despite various remaining problems, there is hope for new dynamism after the pandemic and several reasonable reforms. After an economic contraction of almost 9 percent in 2020, I expect an economic expansion of around 4 percent in 2021 followed by a growth rate of around 5 percent in 2022.

The coronavirus pandemic caused a a health crisis and a severe recession in Italy. Many people died from the virus. Gross domestic product dropped by 8.9 percent in 2020 and the situation on the labor market is difficult. In February 2020, Italy was the first European country that was severely hit by the Covid-19 pandemic and the first European country to impose a strict lockdown. As elsewhere, travel, tourism, hospitality, entertainment and many other sectors of the economy were hard hit. As expected, a fast recovery started during the spring of 2020. However, a fast increase in Covid-19 cases in the fall of 2020 again led to various strict measures to contain the pandemic. Many of these measures have remained in place. Some regions could somewhat lessen the measures while others had to tighten them again amid high infection rates.

Several vaccines are now available and I expect that the various measures will be gradually removed in the next months. The beginning of the summer also helps bring infection rates down. However, it is not known at the moment whether virus mutations will make the situation worse again. For instance, some or all the available vaccines might not be fully effective against these mutations.

After the Italian economy had expanded by 15.9 percent in the third quarter of 2020 (after drops of 5.5 percent in the first quarter and 13.0 percent in the second quarter), output again contracted at a rate of 1.9 percent in the fourth quarter of 2020. While private investment moderately increased, private consumption decreased 2.7 percent. There was a rise in public spending (+1.5 percent), which prevented a higher contraction of economic activity. There was a sharp moderation in export growth (+1.3 percent), while imports expanded at a solid rate (+5.4 percent).

Since the start of the pandemic, my main worries have not been related to the short-term, but to developments in the medium- and long-term. There will probably be a solid recovery over the summer. The rebound will be supported by a moderate increase in tourism exports. Currently, one can expect that a fair amount of (vaccinated) tourists will be allowed to visit the country, although the numbers seen before the pandemic will obviously not (yet) been achieved. In the fall and winter, the economic recovery will continue, but slow down.

Expansionary fiscal and monetary policies will support the gradual recovery of the economy and the labor market. But the situation will continue to be difficult for many people. Monetary policy of the European Central Bank will continue to be expansionary. In addition, Italy will receive financial support from the recovery fund of the European Union (probably more than 200 billion euros) and supplement them with a small amount of own fiscal resources. Many effects of these public expenditures will be relevant for the medium term, but there might also be some smaller short-run impacts. Thes funds are planned to be used, among others, for infrastructure projects such as high-speed trains, “green” energy, and projects surrounding the “digital economy”. In the years to come, the further accumulation of public debt might be a burden and the government should aim at gradually achieving a balanced budget to bring the debt-to-GDP ratio down again in the medium term. The new prime minister, Mario Draghi (the former ECB president), is trying to implement sensible measures to reform the Italian economy. One should not expect miracles, but I am cautiously optimistic for the Italian economy. It has a lot of potential such as a lot of productive small and medium-sized firms and skilled people.

For the first quarter of 2021, I expect an economic stagnation, which will be followed by a small expansion in the second quarter. For the third quarter of 2021 (July to September), I expect a solid recovery with a growth rate of almost 10 percent. The recovery will then continue but slow down to around 1 percent per quarter. For the whole year 2021, I see an economic expansion of around 4 percent followed by a growth rate of around 5 percent in 2022. Inflation will gradually increase towards two percent (the target of the ECB). The situation on the labor market will also improve, but remain difficult for many people. Obviously, such forecasts are associated with a high degree of uncertainty.

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What caught my eye: International debt, sustainability, currency manipulation, and much more…

“The US is increasingly a net debtor nation. Should we worry?” by Gian Maria Milesi-Ferretti. Highly recommended!:

“Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Tim Bartz and Stefan Kaiser on 1 April and published on 9 April 2021, in print on 10 April 2021”:

https://www.ecb.europa.eu/press/inter/date/2021/html/ecb.in210409~c8c348a12c.en.html

“Remarks by Philip R. Lane, Member of the Executive Board of the ECB, at “The Outlook for the Economy and Finance” workshop (fully digital) organised by The European House – Ambrosetti”:

https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210327~7b65e6526e.en.html

“The Pandemic’s Effect on Measured Wage Growth” By Cecilia Rouse and Martha Gimbel:

https://www.whitehouse.gov/briefing-room/blog/2021/04/19/the-pandemics-effect-on-measured-wage-growth/

“The Dangers of Data-Based Certainty” by Diane Coyle:

https://www.project-syndicate.org/commentary/machine-learning-artificial-intelligence-data-limitations-by-diane-coyle-2021-04

“Currency manipulation rebounded in 2020 as pandemic concerns rose” by Joseph E. Gagnon (PIIE) and Madi Sarsenbayev:

https://www.piie.com/blogs/realtime-economic-issues-watch/currency-manipulation-rebounded-2020-pandemic-concerns-rose?

Kaj Embren, a Swedish sustainability expert:

George Stigler 50 Years Later: Revisiting The Theory of Economic Regulation:

https://www.chicagobooth.edu/research/stigler/events/george-stigler-50-years-later-revisiting-the-theory-of-economic-regulation

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Quote of the week – Robinson

“Ideology is like breath: you never smell your own.”

Joan Robinson

Do you agree?

The last quotes were from Robert Mundell, Alfred Marschall, Janet Yellen, Ludwig von Mises, Thorstein Veblen, Deirdre N. McCloskey, Paul Samuelson, Elinor Ostrom, Robert Solow, Joan Robinson, and Friedrich A. Hayek.

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The French economy: Delayed recovery

The coronavirus pandemic caused a severe recession in France. I expect a solid recovery, but it will be somewhat slower than in some other advanced economies.

In France, gross domestic product fell 8.2 percent on average in 2020 after many downs and ups. In the fourth quarter of last year, output contracted at a rate of 1.4 percent compared with the previous quarter. A new wave of infections and various lockdown measures, some of them drastic, led to a sharp drop in private consumption of more than five percent. Investment, however, moderately expanded. Exports increased at a solid rate (+5.8 percent) in the fourth quarter. Since the growth rate of imports was only 1.8 percent, net exports increased compared with the third quarter.

In the first quarter of 2021, the French economy is expected to slightly contract. The pandemic will also weigh on economic growth in the second quarter, although I expect a low positive number. Various measures to curb the virus will remain in place during spring. In addition, the pace of the French vaccination program advances at a slower pace than, for instance, in the United Kingdom and the United States. I think that the pandemic will leave deep scars and French economic output will need more time to recover. Having said that, a solid recovery is hopefully ahead in the second half of 2021 and 2022. Business sentiment and consumer confidence show signs of improvement compared to the winter months.

The gradual easing of containment measures will stimulate private consumption and investment. This should also improve the situation on the labor market. In addition, the household saving ratio increased during 2020. Over time, at least some of these savings will be used for private consumption purposes when lockdown measures are eased. Households have experienced the pandemic in different ways. Some groups have been suffering a lot, while other groups could increase their savings. Strong economic growth in the United States, stimulated by fiscal policy and fast vaccinations, will help the French economic recovery. However, most European countries face similar health and economic situations to France, which will weigh on the recovery in Europe including France.

Against the backdrop of strong consumer demand and gradually increasing foreign demand, business investment will also increase noticeably. Corporate financing conditions will probably be somewhat less favorable than last year, but will continue to support investment. Monetary policy of the European Central Bank will remain expansionary and support the economic recovery.

All in all, I expect that the French economy will grow by around 4.5 percent this year. Next year, the growth rate is also likely to remain high at five percent. My forecast for 2021 is slightly lower than what other forecasts predict, while I expect a higher growth rate for 2022 than others. In my opinion, the recovery will be more delayed due to the pandemic related stagnation in the first half of 2021. Inflation will remain subdued for the moment, but will somewhat increase in the second half of 2021. Regarding inflation, I am a bit more concerned than others. While I do not see a strong increase in inflation, it might be somewhat higher than some of my colleagues predict.

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What caught my eye: Central bank independence, creative destruction, American nostalgia, and much more…

“Central Bank Independence. Lessons from History”, a great discussion with Stefano Ugolini, Barry Eichengreen, Harold James, and Andrew G. Haldane:

https://www.norges-bank.no/ryggpanel2021

“Will Productivity and Growth Return After the COVID-19 Crisis?” Highly recommended:

https://itif.org/events/2021/04/20/will-productivity-and-growth-return-after-covid-19-crisis?

“Global goliaths: Multinational corporations in the 21st century economy”, very interesting:

“The price of American economic nostalgia” (Adam S. Posen (PIIE), Pinelopi Koujianou Goldberg (PIIE), Robert Z. Lawrence (PIIE) and Simeon Djankov):

https://www.piie.com/events/price-american-economic-nostalgia

“The Power of Creative Destruction: Economic Upheaval and the Wealth of Nations” Philippe Aghion:

https://www.piie.com/events/power-creative-destruction-economic-upheaval-and-wealth-nations

“How to revisit central banking and financial stability”:

https://www.piie.com/events/how-revisit-central-banking-and-financial-stability

Industrial production in the United States increased 1.4 percent in March:

https://www.federalreserve.gov/releases/g17/current/default.htm

“Adapting workers to the modern economy: Alternative training and certification” by Marcus Casey and Ember Smith:

“Supervising cryptoassets for anti-money laundering” by Rodrigo Coelho, Jonathan Fishman and Denise Garcia Ocampo:

https://www.bis.org/fsi/publ/insights31.htm

“An Update on How Households Are Using Stimulus Checks” by Olivier Armantier, Leo Goldman, Gizem Koşar, and Wilbert van der Klaauw:

https://libertystreeteconomics.newyorkfed.org/2021/04/an-update-on-how-households-are-using-stimulus-checks.html

Minutes of the Federal Open Market Committee, March 16-17, 2021:

https://www.federalreserve.gov/newsevents/pressreleases/monetary20210407a.htm

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Quote of the week – Robert Mundell

“The benefits from a world currency would be enormous.”

Robert Mundell

Do you agree?

The last quotes were from Alfred Marschall, Janet Yellen, Ludwig von Mises, Thorstein Veblen, Deirdre N. McCloskey, Paul Samuelson, Elinor Ostrom, Robert Solow, Joan Robinson, and Friedrich A. Hayek.

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Low-condition transfers instead of an unconditional basic income

The idea of an unconditional basic income has gained additional momentum since the outbreak of the corona pandemic. There are good reasons for this: the pandemic will probably lead to technological change penetrating our society more quickly and changing it. Uncertainties about job losses, for example, are increasing. In addition, the pandemic has once again highlighted how different people’s circumstances are and how conventional social systems can reach their limits. It is very possible that various forms of basic income will become a reality more often than was thought before the pandemic – especially in Anglo-Saxon countries where welfare systems are less developed. Completely unconditional basic incomes, as are often discussed, are still unlikely, however, and probably also not expedient. Instead, variants of low condition transfers as, for instance, payments linked to minimum conditions, are likely to be increasingly introduced.

Since the outbreak of the corona pandemic, low-condition transfer payments have been decided in various countries in order to be able to distribute funds to people quickly and without bureaucracy. The best-known example is the total of 3200 US dollars that individuals with low or medium incomes have received in three tranches since March 2020. Low-condition transfer payments are similar to an unconditional basic income, but are subject to some conditions – such as the amount of income – and are usually insufficient to cover living expenses. Several developments suggest that unconditional transfer payments may continue to play a more important role in the future than was recently thought. The pandemic is currently acting as a kind of catalyst, accelerating technological and social change – such as work from home, digital education or forms of telemedicine. In the future, hybrid forms of services that combine elements of face-to-face and digital exchanges are likely to remain even more so than before the pandemic.

These developments mean that job profiles are changing and many people understandably struggle to adapt to rapidly changing requirements. In addition, more office jobs are at risk from automation or relocation abroad. Work from home, for example, has many positive aspects in terms of flexibility. At the same time, however, some companies may be tempted to have the same work done more cheaply from another country. In addition, robots or artificial intelligence could take more and more work away from people and cause high unemployment among some population groups. It is undisputed that structural change of the kind we are currently experiencing always represents a major challenge for the labor market and the welfare state. Existing knowledge and skills acquired in the past may be rapidly devalued. It is true that, as with past technological changes, many new jobs will be created to compensate for the loss of other jobs. But the situation is very stressful for people who lose their jobs and may not have the appropriate training for new jobs. At least temporarily, unemployment may increase and social tensions may arise in society.

In addition, flexible forms of employment such as on-call work and project-based work are on the rise. For these forms of employment, however, social security is often worse than for permanent employees. This is clearly evident in the current crisis, in which jobs have suddenly disappeared for many. Another important issue that is likely to promote low-condition transfers is the individualization of life circumstances. There is increasing variation in how people take career breaks or work part-time to do unpaid work in the form of childcare or caring for relatives, for example. Current social security systems do not take this into account in an adequate way.

Uncertainties and individualization are on the rise, and people are likely to increasingly call for new forms of social security. It is unlikely that countries will introduce comprehensive and living wage forms of basic income. A rapid and radical transformation of social security systems would be too complex and risky. Ambitious ideas for an unconditional basic income – such as the popular initiative in Switzerland – have repeatedly failed because they would have led to drastic changes in the welfare state and society that were difficult for people to assess. In particular, questions of financing and incentives to work were not clear. It is likely, however, that more and more forms of low-condition transfers will emerge. For example, low-condition financial support for continuing education may become more popular because, in a world with uncertain futures and employment prospects, educational investments are associated with high uncertainty and existing skills may rapidly lose their value.

Whether an expansion of such low-condition time-out incomes, an unconditional basic income, or simply a slight modification of existing systems is the better solution depends largely on how technological change will affect our lives and work in the coming years and how our societies respond to it. It is the task of science and society to increasingly experiment with different types of a basic income or low-condition transfers. This will provide our societies with more experience and facts to make decisions about the future of work and social security systems.

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What caught my eye: The future of payments, the U.S. productivity slowdown, flexible working, and much more…

“Which Famous Economist Are You Most Similar To?” Quite funny:

http://whichfamouseconomistareyoumostsimilarto.com

“The Future of Payments Report” by Algorand:

https://www.algorand.com/resources/blog/the-future-of-payments-report

“Flexible working: lessons from the pandemic”, some quite interesting thoughts:

https://www.cipd.co.uk/knowledge/fundamentals/relations/flexible-working/flexible-working-lessons-pandemic?

“Benefits and Vulnerabilities of Global Semiconductor Supply Chain”:

https://www.semiconductors.org/study-identifies-benefits-and-vulnerabilities-of-global-semiconductor-supply-chain-recommends-government-actions-to-strengthen-it/

“Late greats: why some brilliant ideas get overlooked”:

Events organized by the National Science Foundation on so many interesting topics:

https://www.nsf.gov/events/

“Taxing Multinationals: A Fundamental Shift Is Under Way” by Tommaso Faccio, Jayati Ghosh:

https://www.intereconomics.eu/contents/year/2021/number/2/article/taxing-multinationals-a-fundamental-shift-is-under-way.html

A great analysis on the U.S. productivity slowdown by the BLS. Highly recommended:

https://www.bls.gov/opub/mlr/2021/article/the-us-productivity-slowdown-the-economy-wide-and-industry-level-analysis.htm

“Ed Nelson on Milton Friedman’s Legacy, the Quantity Theory of Money, and His Vision for a Money Supply Growth Rule” Macro Musings with David Beckworth:

https://www.mercatus.org/bridge/podcasts/03292021/ed-nelson-milton-friedmans-legacy-quantity-theory-money-and-his-vision

Paul Krugman on Robert Mundell:

https://voxeu.org/article/mundell-difference

“Pandemic Prices: Assessing Inflation in the Months and Years Ahead” by Jared Bernstein and Ernie Tedeschi

https://www.whitehouse.gov/briefing-room/blog/2021/04/12/pandemic-prices-assessing-inflation-in-the-months-and-years-ahead/

The “Ezra Klein show” with Tressie McMillan Cottom on success and merit:

And again the Ezra Klein show with Brian Deese on Biden’s thinking:

A very good interview with Tyler Cowen at Econtalk (host Russ Roberts):

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The Canadian Economy: Solid economic recovery

As in many other countries, the Covid-19 pandemic has led to a dramatic down and up of the Canadian economy. As expected, gross domestic product continued its rebound in the fourth quarter of 2020 with a growth rate of 2.3 percent. In the third quarter, the economy expanded at a rate of 8.9 percent after a dramatic decrease of 11.4 percent in the second quarter. Household consumption stagnated in the fourth quarter, mainly because the pandemic and the measures to contain it were obviously still a drag on the economy and in particular consumption. Residential investment increased because of favorable mortgage rates and the shift of work from home. Corporate investments in equipment increased at solid rates, while investment in non-residential buildings decreased – probably because of less demand for office space. Overall, the Canadian economy experience a sharp recession in 2020. Output was 5.4 percent lower than in 2019.

The situation on the labor market has improved since May, but remains bad. The unemployment rate in February was at 8.2 percent (compared to 5.6 percent in February before the lockdown). The pandemic and the measures to contain it continue to be a serious drag on the economy, although the on-going vaccination program should gradually help re-open the economy. For the first quarter of 2021, I only expect a modest growth rate for the economy. The recovery will probably continue at a faster pace in the second and third quarters. The measures to contain the pandemic will probably become less tight. In particular, private consumption can be expected to recover at a considerable pace. Household savings rates were on average high in 2020 and it can be expected that these savings will help boost private consumption this year. Domestic fiscal and monetary policies support the recovery. The government adopted measures such as income backstops for households and loan guarantee programs. The Bank of Canada reduced its interest rate and adopted asset purchasing programs. Inflation will moderately increase but I currently do not expect massive increases in prices. Obviously, however, the risk for high inflation is more pronounced than in past years. In addition, the massive fiscal stimulus measures in the United States (around 13 percent of U.S. GDP) will also spill over to Canada. I expect that they will lift economic output in 2021 by at least 0.5 percentage points.

All in all, I currently expect the Canadian economy to expand by 5.5 percent in the current year. In 2022, the growth rate is likely to be more moderate at around 3.5 percent.

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What caught my eye: Digital currencies, global value chains, the future of work, and much more…

“Should the Fed Issue Digital Currency?” Jessie Romero, Zhu Wang and Russell Wong:

https://www.richmondfed.org/publications/research/economic_brief/2021/eb_21-10

Transition of money market shocks to emerging markets: by By Aakriti Mathur and Shekhar Hari Kumar:

https://www.bccprogramme.org/blog/a-fistful-of-dollars-transmission-of-global-funding-shocks-to-emerging-markets-by-aakriti-mathur-and-shekhar-hari-kumar

“Shocks, risks and global value chains in a COVID-19 world” by Frank Van Tongeren:

“Unstuffing banks with Fed deposits: Why and how” by Robert McCauley:

https://voxeu.org/article/unstuffing-banks-fed-deposits-why-and-how?

The Stanford seminar in the history of economic thought. Very interesting list of speakers:

https://economics.stanford.edu/events/history-economic-thought

“The Future of Work | Economic and Social Policies for the Digital Era”, a panel discussion at the Institute for New Economic Thinking:

https://www.ineteconomics.org/events/the-future-of-work-economic-and-social-policies-for-the-digital-era-1

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Email: info@eagle-economist.com