by Nathania Zevi
The International Monetary Fund said that Italy must continue down the road to reform the economy that Prime Minister Mario Monti began over last year.
The government has an “ambitious and wide-ranging agenda aims to revive growth,” the Washington-based institute said in its annual report on Italy’s economy.
Monti’s pension reform, his limited deregulation of services, his labor market reform, and the newly announced cuts to state expenditure go in the right direction, but to break Italy’s low-growth, high-debt spiral, more must be done.
“This is a process that must continue and must continue forcefully and expeditiously if it is going to succeed,” said the IMF’s Italian mission chief Kenneth Kang in a conference call.
The group did not revise its growth forecast for the Italian economy, seen shrinking 1.9 percent this year, but it did say that the deficit would be slightly higher than previously forecast, 2.6 percent of gross domestic product versus April’s 2.4 percent forecast.
The May earthquakes in the industrial region of Emilia-Romagna will drag on manufacturing and exports in the third quarter, the IMF added.
Source Thomson Reuters
The big question is wheehtr this downturn will behave like the other post WWII recessions, or like the great depression. So far, most predictions that it would behave normally (starting from a year ago) has been obliterated although much of this is because the government response has been pathetically below expectations (until, perhaps, the last month).Immediate history, therefore, may not be a good prediction. We can note some unique factors:The average lifespan of autos, for instance, has increased, but up through 2006 we continued to exhibit sales growth outpacing population growth. This suggests excess ownership, which can be redistributed through second-hand sales (particularly as people lose jobs). In other words, leaving aside super-deals (and we’ve seen some of them), what is the natural resupply rate for the US auto market? I suspect that, under pressure, consumers could keep their clunkers going quite a while. As new data has come in, the US auto industry has continued to cut production and push back the anticipated date of its demand-rebound, and it may just settle down to a lower steady-state (not necessarily a bad thing). And this is not just a US problem. Sales of importers to the US have suffered almost as much.We can ask the same question of cell-phones and computers. Prior to the meltdown, sales were kept up partially be replacement (upgrading monitors to flat screens) to newer models, and partly by purchases of second and third systems (discretionary). So where are the new systems that are crucial to have, and will people sustain discretionary purchases? (Is there another big leap in the next year, or are we running-out the product lifecycle?) Likewise, homeownership has exceeded historical levels, and we still have an excess supply due to second-home ownership and investment ownership. Also, if we see a long term transition to smaller (but more efficient/comfortable) homes, there is no reason for larger and poorly constructed homes to reflate in value (leaving consumers chained to long-term debt payments).Also, there’s the question remains just how much real and longlasting change has occurred to the consumerist American psyche. We won’t know that for a while, but many semi-discretionary purchases (clothing, accessories, electronics, travel) could continue to suffer as some people re-evaluate their entire lifestyle.Remember, that in spite of the highly-criticized aggressive US Fed action, we just saw 0.4% year-on-year decline in prices. In the long run, there are sectors that need to grow but something needs to keep demand stable/growing long enough for resources to transition into the new sectors (and those new sectors may require significant govt. support).There is still concern that govt. is not doing enough and that the periodic upward blips (with bear market rallies) will keep giving everyone hope that the economy will heal by itself in just a few months (without taking the aggressive steps necessary).