The last decade has proven to be a poor one in sustainability terms. Too much imbalance and instability led to the 2008 financial crisis and the ensuing recession; monetary policy was too slack and boosted prices, in particular on the housing market. Fiscal policy was unbalanced with deficit problems even during boom years and US foreign debt and consequent reliance on foreign creditors in many Asian countries soared. The financial system was far from stable and aggravated the crisis that it had unleashed The business cycle of the last decade has been called 'a bubble economy' (Note 2)
and is impossible to sustain.
For the whole of 2010, the world's mature economies found themselves facing a series of dilemmas that had been caused by attempts to kick-start a recovery; on the one hand fiscal policies were supposed to prop up a recovery and on the other launch budget policies that would reduce public deficits in the medium and long term. Monetary policies were supposed to restore normality on liquidity and public-fund markets, and lower real short-term interest rates to near zero, but also to make the budgetary policy less onerous. Governments were also supposed to introduce stricter regulations for financial markets, bank capitalisation and bank monitoring, but still not create additional or indeed new obstacles to financing enterprises.
If we look at the current situation, we find that the economy is fighting back, but it is clear that some of the causes behind the worst recession in the last eighty years have not yet been cured: monetary policy is still slack, public deficits are still sky-high, the US trade balance is still negative, and the regulations of world finance are still practically the same as the pre-crisis ones. The markets have also realised that the productivity and competitiveness gap between mature economies and emerging ones is vast, as is the North-South divide within the EU.
On top of this sits the crisis in North Africa, which exploded in early 2011; in the space of a few short weeks, it set the business cycle back due to the possible consequences of oil prices on growth, inflation and interest rates. Macro-economic effects aside, the popular revolts in North Africa have focused international debate on the need for sustainable development that encompasses a more equitable distribution of freedom, democracy and justice.
The world economy
Figures for 2010 confirm the recovery is underway: Gross World Product (GWP) rose by 5% due to a +12.4% spurt in international trade. The recovery, however, is two-track: growth in mature economies is still fairly sluggish and unemployment is still high, whereas activity in emerging economies is quite sprightly. (Figure 1.1.1)
and (Figure 1.1.2)
If the positive trend in industrial production is an indicator that the economy took off in 2010, there is still, however, a noticeable gap between mature and emerging economies. The same situation applies to trends in consumption and investment. In 2010, global demand was in fairly robust health in terms of consumption, while investments were still poorly. Consumption exceeded pre-crisis levels by some way in the aggregate of emerging economies, whereas mature economies were making up for their losses. Investments in industrialised countries are still below pre-crisis levels, but they are driving the economies of emerging countries.
The International Monetary Fund forecasts that GWP will rise by 4.4% in 2011.
The US economy has grown in fits and starts since summer 2009 when the slump that started in late 2007 came to a halt. In 2010 US Gross Domestic Product (GDP) rose by 2.9%; the International Monetary Fund and the main international study centres predict a growth of between 2.8% and 3% in 2011. Unemployment, however, is still high, say the centres, and it will remain within a whisker of 10%. Property prices, which collapsed by about 30% in 2006, could fall by a further 10% this year (Note 3)
, while the situation for mortgage arrears continues to worsen. Families have been suffering serious losses to property value, finances and pensions since early 2008. Although these resources are being rebuilt thanks to a major return to saving, many US consumers have very few financial resources available.
Japan closed 2010 up by 3.9%, but its future is still uncertain as it has been hit hard in the aftermath of the catastrophe in March 2011. There may be two main effects of the destruction wrought by the tsunami: it may worsen the situation, or the reconstruction may spark a recovery (Manzocchi).
Emerging and developing countries are driving the world recovery as they recorded growth of 7.3% in 2010 and estimates of 6.5% in 2011. BRIC-area countries (Brazil, Russia, India and China) are spearheading this recovery, although to insist on calling them 'emerging' countries is somewhat forced nowadays, as a glance at their contribution to GWP will confirm. China is the world's second biggest economy and its GDP contributed to 13.6% of world GDP in 2010; the US, in first place, accounted for 19.7%. Brazil, Russia and India, combined, make up 11.3%. These countries have 'emerged' from their Third-World status and they should be replaced with other 'emerging' countries with identical capacity for growth, such as Turkey, Mexico, Indonesia and South Korea. (Table 1.1.1)
and (Table 1.1.2)
Tension in North Africa
The explosion of popular revolts in Egypt, Tunisia, Libya and Syria early this year and the concern that protests could spread to other Arab countries such as Yemen and Bahrain led us to reflect both upon the ethics and the effects on the business cycle, as the consequences are similar to those of the fall of the Berlin Wall in 1989.
Tension in North Africa is due to widespread social and economic malaise that has been bubbling under a surface of apparent immobilism for many years. Some simple indicators demonstrate the social and economic imbalance, although some of the economies have grown considerably in the last decade. GDP per capita is under 2,500 dollars in Yemen, just above 6,000 dollars in Egypt, and under 10,000 dollars in Tunisia. One of the problems for these countries is unemployment: overall unemployment rates are very high and reach 30% among the young; this is particularly worrying in areas with high population growth and where the number of under-30s tops 50%. The political and social situation of these peoples was aggravated in the second half of 2010 when the prices of primary food goods rose on the back of soaring international prices for agricultural raw materials. (Table 1.1.3)
In general, an initial problem of the North Africa crisis concerns oil, which could be in short supply worldwide due to a lack of Libyan crude on the market, but the overall effect will depend on whether the other oil-producing countries manage to compensate for the shortage. The natural candidate is Saudi Arabia, which is expected to increase production due to the recent increases in oil prices and to the need to distribute revenue to the population. The situation would become increasingly complex if it were to continue in the long term and tension were to spread to other oil-producing countries. Rising oil prices are also causing havoc because the problems with crude oil supply come at a time when there are hopes for a recovery in global demand.
Higher oil prices affect inflation and should inflation continue to rise, there would be repercussions on interest rates. In a few short weeks, in February and March 2011, rising oil prices weighed on inflation and led to a review of international economic policy; the European Central Bank (ECB), in particular, has recently announced that it wants to begin normalising interest rates in order to cope with the risk of rising inflation.
A possible slump in demand in North Africa is also holding back the international economy in 2011. North Africa actually accounts for a very small slice of international imports, about 1%. The area receives about 4% of Italy's exports, while Morocco, Algeria, Tunisia, Libya and Egypt account for 2.5% of Veneto's total export value.
Raw materials and inflation
A recovery in industrial production in 2010 caused a surge in the prices of raw materials; in line with trends in the second half of the 2000s, the price elasticity of raw materials on the international market was particularly high. The increase in the prices of food raw materials, which started in summer 2010, extended over the next few months and was fed by freak weather conditions in Asia, Europe and America. These conditions led to a shortage, in particular of cereals and grain, which will continue to affect food prices in 2011. (Figure 1.1.3)
The biggest increases were felt by the prices of the industrial commodities most exposed to China's growth, such as non-ferrous metals. The prices of copper and some agricultural commodities, such as natural rubber and cotton, hit a record high in the second half of 2010. Growth in energy products was bright, but a little dimmer than growth in energy raw materials, and this reflected fading end demand in Organisation for Economic Cooperation and Development (OECD) countries, who are the main consumers of oil products. It was only in the latter part of 2010 when US demand picked up that the price of Brent crude topped 90 dollars a barrel. Brent crude prices closed the year with major rises and this continued in early 2011 due to a temporary fall in US domestic supply; prices then surged on the back on the revolts in Arab countries.
Rising commodity prices kick-started inflation, which rose from the lows of 2009. Rapidly soaring prices in emerging countries were fuelled by the demand for raw materials, which rose due to a need for investments and to an increase in the prices of the main foodstuffs in consumers' shopping baskets.
At the same time, mature economies proved to be fairly immune to the recovery in inflation until the end of 2010 when food and energy prices began to make themselves felt on consumer prices in the US and the Euro Area.
In the last two years, US monetary policy has weakened the dollar, which has become a currency for carry trades
, a speculative practice whereby money is borrowed in countries with lower interest rates and then exchanged for the currency of countries where investments have a better return. In many cases, the falling trend in the dollar is countered by reserve accumulation in emerging countries. The difficult situation of public finances in European countries affects the development of exchange markets; and indeed for a while the euro stopped its strong run against the dollar and started to lose ground. As the dollar was unable to strengthen against the euro and could not even cause an appreciation of the Chinese Yuan due to the fixed exchange rate policy followed by the Chinese authorities, it offloaded onto a limited set of currencies, such as the Japanese yen or the Swiss franc, or even onto some emerging economies, which thus recorded an appreciation against the dollar, euro and Yuan at the same time.
The economic situation in March 2011 saw the euro gain ground on the dollar as there were fresh announcements that the ECB was in favour of raising interest rates; on 29 April one euro was worth 1.486 dollars, the highest rate since the peak of 5 November 2010 and one that beat its 13 January 2010 record when one euro was worth 1.456 dollars. (Figure 1.1.4)
2010 in Europe
The European Union closed the year with 1.8% growth, as did the Euro Area, proof that a recovery was underway. The last few months of the year saw a rise in domestic demand and a recovery in exports, which was fostered by renewed world trade.
In the Euro Area, the German economy was the main contributor as it experienced a surge in international trade and investments in machinery and equipment. Nearby economies, such as Austria, Belgium and Holland, followed in Germany's wake, as did Finland. Economies in the Mediterranean area, however, were still sluggish; in addition to Italy's structurally weak trend and the recession in Spain, France's economy was also fairly wobbly despite having held out well against the crisis. Other countries experiencing a downturn included Ireland and Greece. Although the PIGS, the unflattering acronym for Portugal, Ireland, Greece and Spain, had left behind the trough of the first quarter of 2009, their GDP still shrank by -0.7% in 2010. Without the PIGS, Euro Area GDP increased by 2.3% in 2010 compared to 2009. (Table 1.1.4)
and (Figure 1.1.5)
The Italian economy
In Italy, GDP rose by 1.3% in 2010, the result of a minor recovery early in the year which stabilised at around 1.5%. The sectors driving this trend were industry in the narrow sense and services in retail and transport. Despite growth in private consumption and investments, levels were still well below pre-crisis ones due to the 2009 slump. (Figure 1.1.6)
In 2010, industrial activity was looking up: the industrial production index continued to increase, up 6.4% on the previous year; the turnover index also grew, up 9.9% on 2009, driven both by foreign demand, up 15.6%, and by domestic demand, up 7.5%; the new orders index for 2010 was up 13.9%, a figure mainly buoyed by orders from abroad, up 21.2%. All of the indices made a large improvement on the lows of spring 2009, but the gap between these and pre-crisis figures has still not been bridged. Trends in industrial production varied according to the type of goods: falls on 2009 production levels of consumer goods were fairly contained, but there was only a weak recovery in 2010; producers of intermediate goods, and especially of capital goods, witnessed a heavier fall in 2009 on account of tumbling demand by enterprises during the crisis, but their recovery in 2010 was much sprightlier. (Figure 1.1.7)
The climate of confidence in Italy
Manufacturing industry confidence continued to improve throughout 2010, returning to the levels of early 2008, when a recession was still nowhere in sight. This trend may give rise to some doubt as to the reliability of these qualitative indicators because industrial production at that time had undergone losses in product volume. The fall is most likely due to failing enterprises, but the ones that managed to survive saw an improvement in their production and confidence was therefore higher, although not all of their problems had been ironed out. Overall confidence was good among entrepreneurs in terms of both new orders, especially among manufacturers of intermediate and capital goods, and production.
The optimism of manufacturers, however, is not shared by the construction industry, which has suffered falls in the construction of buildings rather than in civil engineering and specialised construction work. (Figure 1.1.8)
Regarding consumers, Italy's Institute for Studies and Economic Analyses (ISAE) revealed that families' confidence was good. However, although it was up on the 2008 lows, confidence rose until summer 2009, settled, but then dipped in early 2010; it then picked up towards the end of the year, but was up and down in early 2011. Although families showed a certain optimism, they were still uncertain about the economic climate on account of the labour market. (Figure 1.1.9)
Official figures from the regional government's accounts department stop at 2009, the year that measures the impact of the international recession. Italy's GDP narrowed by 6% in the North West, 5.6% in the North East, 3.9% in the Centre and 4.3% in the South. The North West was the area worst hit by the crisis. The differences between areas depend mainly on the make-up of their sectors. The crisis hit the North harder because of its high percentage of industry in the narrow sense. Economic activity held out better in Southern and Central Italy because of their concentration of services, which experienced gentler and fairly even falls throughout the country.
Against this backdrop, Veneto's economy slowed in line with those of the other heavily industrialised regions; in 2009, Veneto's GDP narrowed by 5.9%.
The worst effects of the economic and financial crisis were felt in Italy's more industrialised regions: industry value added fell heavily in Piemonte (-16%), Lombardia (-15%), Veneto (-14.1%) and Emilia Romagna (-13.7%). Other sectors of Veneto's economy also experienced a fall in value added: -2% in agriculture and -2.2% in services. Household expenditure in Veneto, which accounts for 8.9% of the Italian total, dipped in line with the rest of the country, down 1.8%.
GDP per inhabitant, equal to 28,856 euro compared to 25,237 euro at national level, fell by 4.9%.
Despite these falls, once again in 2009, Veneto was found to be the third largest regional contributor to Italy's GDP: the region contributed 9.3% of the national total, behind Lazio (11.1%) and Lombardia (20.4%).
Forecasts for 2010 by the Prometeia research institute state that Veneto's economy will grow by 1.6%, more than the national average of 1.3%, and is likely to grow by 1.3% in 2011.
The 2010 forecasts are attributable mainly to a bounce back in the industry in the narrow sense, where value is expected to grow by almost 4 percentage points and to a recovery of 1.2 percentage point in both agriculture and services. The construction sector is expected to narrow by 0.9%.
Lively international trade in 2010 most certainly made a major contribution to growth. Exports will continue to drive growth in 2011, although uncertainty about markets in North Africa and Japan may put a dampener on prospects. Morocco, Algeria, Tunisia, Libya and Egypt, however, account for very little of Veneto's exports (2.5%). Japan accounts for 1% of Veneto's exports and this mainly concerns the fashion industry. (Table 1.1.5)
, (Figure 1.1.10)
, (Figure 1.1.11)
and (Figure 1.1.12)
Business and consumer confidence in Veneto
The most recent quarterly indicators at regional level regard the perceived confidence of both entrepreneurs and consumers.
According to an ISAE/ISTAT report, confidence in Veneto's manufacturing industry surged in the first nine months of 2010, but then faded towards the end of the year. Opinions improved both concerning the state of order books and production expectations. Particular optimism surrounded opinions on orders from overseas. The optimism of late 2010 fell in early 2011 on account of a slight drop in forecasts for new orders and production. (Figure 1.1.13)
The overall consumer confidence index, which measures the optimism/pessimism of consumers based on the average of nine indices related to general and individual economic circumstances, was up and down for the whole of 2010. Although certainly brighter than the darkest moments of the crisis, the index slumped in February 2010 only to pick up again a little later. (Figure 1.1.14)
Value added by sector
In 2009, the most recent figures for Veneto, the services industry, which accounted for 65.4% of Veneto's entire value added, narrowed by 2.2%, a little better than services at national level, down 2.6%. Agriculture, which makes a limited contribution to regional wealth (1.6%) fell by 2.0% in 2009, again slightly better than agriculture at national level, down 2.3%. Industry in the narrow sense, which accounts for 26% of Veneto's entire value added, was hit hard by the international slump in demand, falling by 15.4%, in line with the national figure, down 15.6%.
Forecasts for 2010 suggest a general increase, which will be strongest in industry in the narrow sense. The construction industry is expected to need another year before making a recovery. In 2010, agriculture value added is expected to rise by 1% at national level and by 1.2% in Veneto. Italy's industry in the narrow sense increased by 4.8% in 2010, but its construction industry is still frail, down 3.5%. Forecasts for Veneto state that value added for industry in the narrow sense will rise by 3.9%, but that construction will narrow by 0.9%. Wealth produced by services in 2010 will increase by 1.1% on 2009 at national level and by 1.2% in Veneto.
There will be positive variations in all sectors in 2011, except in agriculture. (Figure 1.1.15)
, (Figure 1.1.16)
, (Figure 1.1.17)
and (Figure 1.1.18)
In 2010, at national level, there was an increase of 2.5 percentage points in gross fixed investments due to an 11.1% surge in investments in machinery and equipment and an 8.5% increase in investments in vehicles; there was, however, a 3.7% fall in investments in construction.
There was a sharp rise in the purchases of vehicles during the first three quarters of the year, and of machinery, equipment and other products in the central months. Investment expenditure in capital goods almost reached pre-crisis levels and it only slowed in the final quarter due to the expiry of the fiscal incentives introduced by the Tremonti-ter financial law, which had previously supported demand.
The construction industry continued the downward trend that had started in the fourth quarter of 2007, worsened in 2009 (-8.7%) and fell again in 2010 (-3.7%).
On a regional level, the last official figures are from 2007, when investments increased on the values of the previous year, up 1.6%; this was the result of positive investment in industry in the narrow sense, up 7.3%, stagnation in the primary sector, up 0.6%, a steep decline in construction, down 19.6%, and a rise in the tertiary sector, up 0.7%.
A similar fall in investments for Veneto's construction industry to the one at national level is estimated in 2008 and 2009, but in 2010 a recovery in exports, which are closely linked to investments, will help this sector. (Figure 1.1.19)
In 2010, there was an increase in real terms of 0.6% in final national consumption, produced by the 1% rise in household expenditure and by the 0.6% fall in government and private social institutional expenditure.
Expenditure on private consumption across the national economy in 2010 stopped the falling trend that had started in 2008 and underwent a mild recovery. Both this trend and the economy, however, confirmed that progress was sluggish and uncertain. Italian families are still suffering from the currently weak recovery and labour market uncertainty. Both lead families to postpone non-essential spending; indeed, purchases of durable goods experienced a -1.9% fall. Consumption of semi-durable goods saw a strong recovery (+4.1%), while spending on non-durable goods and services had more modest variations: 1% and 0.9% respectively. (Figure 1.1.20)
, (Figure 1.1.21)
and (Figure 1.1.22)
In Veneto, figures for 2009, the most recent, show that household consumption expenditure fell by 1.8%. In 2010, expenditure is expected to increase by 0.7%, with recovery still being weak in 2011 at +0.9%. (Figure 1.1.23)
Prices in Veneto
In 2010 in Italy inflation stood at 1.5%, a rise on figures for 2009 when the consumer price index was the lowest it had been for 50 years. The year just passed showed a growth rate that was double the previous year, but despite this it did not reach a high value. Average inflation in Veneto was 1.4%, slightly lower than the national level; the provincial capitals that stood out for their lower rates were Treviso, Vicenza and Belluno.
In Veneto, expenditure by category showed a similar trend to national figures: the largest contributions to average growth over the last year were made by transport, but alcoholic beverages, tobacco, services and education also played their part.
A major contribution to rising inflation was made by transport prices, boosted by energy prices, which recovered by approximately 13 percentage points between 2009 and 2010; they rose from around -9% to +4%, contributing just under one percentage point to the inflation rise of the last year. Prices of petrol and heating products were driven higher by the price of oil, which shot up by more than 30% over the year. This trend had an impact on rising inflation against a backdrop of generally weak economic growth. (Figure 1.1.24)