Italian Import Weakness Works Its Magic

The chart on Italian export and import growth and its trade balance tells volumes about how austerity works. In 2011 Italian imports began to fall behind Italian export growth as domestic growth slowed. Of course, the whole of the euro-zone was impacted by various austerity programs and Italian exports slowed too. But imports slowed by even more. This created a positive gap boosting trade to show a surplus. That has helped to cut back on Italy's current account deficit, helping growth prospects.

Modern, developed economies tend to have imports track GDP with a relatively high import elasticity, which means that when GDP grows by one percentage point imports tend to grow by more than one percentage points. That works in reverse too when GDP weakens and it is the force that is now compressing Italian imports. The growth of exports depends on the growth in foreign markets; it also depends on the kinds of goods a country is exporting. Italy has a mix of industrial goods including consumer goods. The global slump has hit its exports. Austerity has clobbered its consumer confidence and hit domestic demand.

The chart shows that imports have sunk below the zero growth line and are contracting. Italian exports are still managing some growth. Import growth rates are no longer declining as they once were but they are showing shrinkage instead of growth and they are only hinting at a move higher. Italian exports too have the smallest of hint of a move to stronger growth rates. Given the current circumstances in Europe it seems too early to get very upbeat on Italian prospects. A new government and PM is likely on the way. Concerns are that if Silvio Berlusconi takes office again, some of the progress Italy has made under Monti could turn to backtracking. If so we will see it in the trade accounts pretty quickly.

Italy's Trade Trends M/M% Monthly Rate Period Specified SAAR Seasonally Adjusted Oct-12 Sep-12 Aug-12 3-Mo 6-Mo 12-Mo Yr-Ago Current Acct Bal 2349 EUR 2315 EUR 1777 EUR 2147 EUR 1514 EUR 1575 EUR 4621 EUR  Goods Balance 2696 EUR 316 EUR 1268 EUR 1427 EUR 1742 EUR 1081 EUR 1851 EUR   Exports 1.7% -3.4% 4.8% 12.0% 11.9% 5.5% 5.7%   Imports -5.8% -0.6% 5.1% -6.3% -6.8% -6.5% 0.6%  Services Balance 16 EUR 492 EUR 195 EUR 104 EUR 128 EUR 230 EUR 636 EUR   Exports -0.1% 0.6% 5.8% 28.3% 3.6% 6.1% 4.0%   Imports -6.4% 10.8% -3.2% 1.3% -3.6% -3.1% -1.2% Not Seasonally Adjusted All Yr/Yr Exports Oct-12 Oct-11 Oct-10 Oct-09  Food&Bev 14.9% 9.3% 9.8% -7.4%  Capital Gds 11.0% 2.5% 17.5% -25.0%  Transport 10.0% -4.9% 20.3% -27.2%  Other Gds 14.4% 8.8% 22.4% -26.1% Imports Oct-12 Oct-11 Oct-10 Oct-09  Food&Bev 7.4% 5.6% 9.9% -9.6%  Capital Gds -5.5% -9.1% 15.5% -18.9%  Transport -18.2% -16.8% 10.1% -13.7%  Consumer Gds 4.1% 5.0% 11.0% -8.7%  Other Gds 5.6% 5.8% 52.6% -34.4% Balances in Mlns of Euros