Bisogna che tutto cambi ?

Bisogna che tutto cambi ?

by Pininvest Analysis

Italian Companies all US listings on pininvest.com

  • 34 constituents
  • -10.5% 1y performance
  • 27.5% volatility
Check the investment theme exit_to_app

Pin-insights

Structural flaws can be papered over for a while in the political discourse because social danger has a way of creeping up, becoming a feature of a familiar landscape, like living under a vulcano

Italy's population has been getting older progressively, the 15-to-64 year age group growing more slowly than the 65+ cohort... but this is not true anymore

This is not a time when alternative policies can be put leisurely to the popular vote as so many options to secure comfort and well-being of all Italians

Demographic trends today are bearing down on the country with a real numerical decline of the workforce, unheard-of since World War I and the Spanish Influenza pandemic swept across the European Continent

These trends may work their way slowly into popular awareness but employment and labor productivity statistics signal a more brutal reality today - a wake-up call for Italian politics

The magnitude of the challenge to achieve a strategic turnaround will take all the representative forces of Italian society to task and Italy's Eurozone partners may not have the option of aloofness much longer

 

***

 

Se vogliamo che tutto rimanga com'è bisogna che tutto cambi

Everything needs to change, so everything can stay the same

 

In the struggle between decay and eternity, between death and abstraction, Don Fabrizio Corbera, prince of Salina, stands at the crossroad of a very Italian dilemma

Lampedusa’s “Gattopardo” senses the destructive inevitability of social upheaval, in quiet desperation for the loss it entails

And indeed, as his nephew Tancredi observes, it is the price to pay ‘so everything can stay the same’

First edition - Feltrinelli 1958

150 years apart as Lampedusa’s novel plays out in the 1860’s of Italy’s unification, Don Fabrizio could stand in, with his clear-eyed pessimism, for many in Italy’s elite today

A far cry from the ‘singing and dancing’ (and spending) stereotype, much in favor in the Northern European public opinion, the mood in Italy swings between sober realism and proud obstinacy

Italy’s political scene and the country’s economics seem to remain in stasis, a parenthesis of suspended reality which will not last, all the more precious as it is fleeting

 

The political scene may well seem animated with a rich cast of characters emerging from the wings and taking center stage before withdrawing again backstage for a time…

Taken at face value, the comedy hardens a large swath of the North European voters in their deprecating ways, nurturing unyielding bitterness amongst Italians

Hardly a promising start to move forward since, in politics, perception is everything and Italy’s political parties, never the country’s most endearing feature, have been gunning for extremes, for lack of palatable moderate options aligned on a European vision

 

Stasis in demography

Commonly understood as a state of stability in which all forces are equal and opposing, therefore canceling each other out, a stasis has dark undertones in the struggles of conflicting currents, encompassing society itself

Tenuous and uncertain, the social balance comes under fire when incontrovertible forces, driving society's underpinnings to breaking point and playing out over a long horizon, are not countered by political initiative

 

Repeated ad nauseam, the dire projections of Italy's aging population have become a familiar dimension of the country's medium term outlook

The horizon however has shriveled, demography is wreaking havoc and only the most short-sighted politicians and market analysts can ignore the pending disruption

Istat, the Italian Institute of Statistics, is blunt in its 2019 annual report assessment (page 14)

Non dimentichiamo poi che oltre all’aumentato squilibrio nella struttura per età della popolazione che ha caratterizzato gli ultimi decenni, più recente-mente si è manifestata (come si è detto a partire dal 2015) una significativa recessione demografica: un vero e proprio calo numerico di cui si ha memoria nella storia d’Italia solo risalendo al lontano biennio 1917-1918, un’epoca segnata dalla Grande Guerra e dai successivi drammatici effetti dell’epide-mia di “spagnola”

Let us not forget then that in addition to the increased imbalance in the age structure of the population that has characterized the last decades, more recently, a significant demographic recession has occurred (as we have said since 2015): a real numerical decline of which we have a record in the history of Italy only going back to the distant years 1917-1918, an era marked by the Great War and the subsequent dramatic effects of the "Spanish" epidemic

 

Indeed, by 2040, the working age population will be down to approx. the level last seen in 1950, when Italy's population was 46.6 million (against 60.4 million in 2019 and a projected 57.2 million in 2040)

source UN DESA Population Division

By 2050, Istat estimates, the 15-64-year age group could make up only 54.2% of Italy's total population, a drop of almost 10% from today's 63.7% (solid when compared to the ratio of 61.6% in France and 64.4% in Germany)

 With drastic consequences for productivity, the drop of more than 6 million in the potent workforce is the reflection of the long term collapse in birthrates, with a decrease of 140 000 births in 2018 compared to 2008 - representing a 24% drop in the decade

By 2016, 45% of women in Italy aged 18-49 didn't have any children at all

To further darken the country's prospects, more than half of the 9,6 million of the 20-34 age group residing in Italy – 5.5 million - are single and living with at least one parent

420 000 residents left Italy in the decade from 2008-18, half of them aged between 20 and 34

Population total & Annual % change - source Macrotrends - data UN  World Population Prospects

Buried on page 37 of the Istat report (2019), the population pyramid in 2018 and its projection for 2050 on current birth rate trends highlight the inevitable - a bulky concentration of 50-year old Italians supported today by a meager youth group of 20-30 year old, a trend getting worse by 2050 with a majority of 70-80 year old, cared for by too few youngsters

2018-2050 Pyramids but no broad base  Source Istat annual report 2019 (p.37)

 

Stasis in productivity

Suspending disbelief, the Italian economy is trudging on

The strains laid bare by the population imbalance and the risks of ripping apart the social texture might be underestimated because their radical novelty is still misunderstood

However, the potential impact on employment and on productivity does not leave much room to wing it by improvising well-trodden arguments about Italian industrial inefficieny gaps

It is probably true that Italy's ineffective educational system has, on average, lowered the quality of the workforce - and it is also true that more restrictive labor regulations and run-up of average salaries following access tot the Euro zone have not been offset by productivity increases

But to maintain that these factors could by themselves explain the divide highlighted by a simple comparison with the German and the French employment data is - in our view - a stretch

 

Data as of Oct. 2019 Italy France Germany
Population 60 360 000 67 190 000 82 850 000
Employed 23 425 640 28 437 000 45 153 000
Unemployed  2 514 000 3 333 700 2 180 000
Employed / Population 38,8% 42,3% 54,5%
       
Part time  3 721 183 4 668 000 11 227 000
Full time employment 14 458 700 22 138 700 29 449 200
Full Time Employment / Pop 24,0% 32,9% 35,5%
Full & Part Time / Pop 30,1% 39,9% 49,1%
source - Trading Economics       

Each of the three large European economies presents singular features, large reliance on part-time employment in Germany and excessive unemployment in France, but the Italian indicators stand out, signaling a potential collapse of the social contract in the country's ageing society

  • full-time and part-time employment occupies only 30% of the Italian population today - compared to approx. 40% in France and 50% in Germany
  • as more Italians enter retirement age than young replacements enter the workforce, the ratio can only be expected to worsen

The country is discovering that the curse of ageing is treacherous and the tide an almost irresistible undercurrent pulling the country far out at sea

 

Productivity of the Italian work force, compared with French and German trends and culled from the same Eurostat source, signals a 'double dip fall-out' following the 2008 downturn, coinciding with the leveling-off of the workforce

The two columns for each country relate to  

  Italy   Germany   France  
2005 115,2 0,3% 107,9 0,9% 118,4 1,0%
2006 114,2 -0,2% 107,5 3,1% 117,4 1,3%
2007 114,2 0,2% 107,3 1,3% 117,2 1,0%
2008 115 -1,2% 106,1 -0,4% 116,2 -0,3%
2009 114,8 -3,7% 103,2 -5,8% 117,2 -1,8%
2010 112,8 2,4% 104,1 3,8% 116,6 1,8%
2011 112,3 0,4% 105,5 2,7% 116,1 1,4%
2012 110,4 -2,7% 104,5 -0,7% 114,8 0,0%
2013 108,9 -0,1% 103,8 -0,4% 116,2 0,4%
2014 107,2 -0,1% 105,8 1,3% 115,6 0,4%
2015 106,1 0,1% 104,8 0,8% 115,2 0,9%
2016 107,8 -0,1% 105,3 1,0% 115 0,5%
2017 107,2 0,5% 105,1 1,1% 114,9 1,3%
          (p)  
2018 106,2 -0,1% 104,5 0,2% 115,1 0,7%
          (p) (p)
Source - Eurostat        pininvest.com

Productivity per hour worked eliminates differences in the full time/part time composition of the workforce 

  • the comparatively poor ranking of Germany (vs. France and Italy) might be due by the very large number of part-time employment (potentially less productive, less demanding low-qualification jobs)  in the exceptionally large German workforce (close to 50% of total population)
  • while both France and Germany have maintained their labor productivity per hour through the financial crisis of 2008, Italy has started going downhill after the crisis and from 2012

Without reading too much in the data set, 2012 has also been the top of the 15-64 year age group, which has been falling back ever since with presumably less qualified workers entering the labor force

Year-on-year % change in real labor productivity signals similar causes of concern for Italy

  • All three countries have been hit by the financial crisis in 2008-2009 but Germany (down a cumulative 6.2%) and France (down a small 2.2%) have clearly regained their balance over the next decade
  • This is not the case for Italy which, following a 3.7% drop and a half-hearted productivity correction in 2010, has been going down year after year

 

While demography is only one of the factors weighing on labor productivity, it is fair to infer from the shrinking work force and ageing cohorts that the structural population imbalance will dominate public policy from now on and for a long time, if the dismal projections of the UN Population Division hold

 Often ignored until it is too late, the urgency of structural reform will need to be confronted in Italy, prioritizing education, work and life opportunities of the young over the benefits older generations have been collecting in the work place and have come to expect in retirement

How this course will play out remains uncertain 

Italy's policians may rise to the challenge over time, as the frailty of the country becomes impossible to ignore

The European playbook remains unknown, but the stability of the euro currency and of Italian debt on the financial markets both depend on clear political engagement

 

Stasis is a safe haven of stability for a while but, as we hope to discuss in our follow-up report, the opposing forces of stasis can only rebalance  in a concerted European framework 

 

Or else - in the words of the author of il Gattopardo -

... il fragore del mare si placò del tutto

... in a thunderclap, the sea fell silent

 

But that was when Don Fabrizio, prince of Salina, died