Italy’s Import and Export Trends Are Still Withering

As Italy’s export and import trends wither on a yr/yr basis. But domestic demand is sinking faster than foreign demand therefore imports are falling faster than exports and that is pushing the current account into surplus. That, in turn, is boosting growth. The weak economy has become its own automatic stabilizer and that current account trend might even improve further if the euro keeps getting weaker, at least after J-curve effects play out.

Over shorter horizons Italian exports are looking even better as they are accelerating over 12- to 6- to 3-months, culminating in a three-month annual rate of growth of 20%. On those same periods imports are falling and the pace of growth is steady over three- and six-months in the range of -7.5% to -8%.

Year-over-year imports are falling for all major imports groups while export categories are varied but generally are showing some life.

If we look at the year-over-year chart for Italy what we see is an interesting relationship between trade-flow growth and the current account. Italy’s last surplus came in 2009 as both export- and import- growth was at its weakest. Its largest deficit came at end 2010 just after export and import flow growth was at its strongest. Now with the export and import flows weak again Italy is flirting with surpluses on its current account again.

All this suggests that Italy’s income elasticity of demand is high. When growth slows imports slow faster than exports and when growth picks up imports rise faster than exports. In fact, you can easily see that effect in the chart. Italy’s pending reforms will blunt this relationship. A rise in the VAT will slow consumption across the board relative income trends and will reduce the link from income growth to imports (to consumption of all kinds). The weaker euro will help to slow import volume, too, by making imports more expensive and will speed exports OUTSIDE the zone by making them more competitive. But Italy still has an intra-zone competiveness problem which it must address. Its internal deficit is less a problem per se that it is evidence that there are things that have gone wrong, namely competitiveness. And this is the real nagging problem for the Zone that it is having trouble even addressing let alone fixing.