This is what happens when the world’s 7th largest economy adopts austerity measures as Delusional Economics warned recently about the core and peripheral nations in the Eurozone. Italy’s Q4 0.7% contraction in GDP and recession was confirmed last night:
A little homework to understand this chart from Scotty Barber at Reuters:
GDP – Gross Domestic Product. This is how economists measure an economy and stays true to the axiom that not everything that can be measured should be counted, and what counts cannot be reliably measured. e.g speculating in house and share prices is included in GDP, as is all government spending (some of which is absolutely necessary, a lot of which is pork barrelling), but intangible values like quality of the environment, stable and transparent legal system, productivity/number of hours worked vs leisure time etc.
The base case for GDP growth is about 2% p.a. for developed countries, and two successive contractions in GDP is technically a “recession”. The more important number is GDP per capita – i.e growth adjusted for population, which has been covered in this post from the recent Australian GDP numbers.
It has been empirically shown that credit growth is a component of GDP growth, so countries that disleverage (decelerate their credit growth, but still positive) or outright deleverage (credit growth is negative), in the absence of increased government spending, will see the economy contract. This is happening in the peripheral countries of Europe – and now Italy – due to austerity and disleveraging.
PMI – Purchasing Managers Index is “an indicator produced by Markit Group and the Institute for Supply Management of financial activity reflecting purchasing managers’ acquisition of goods and services.” In plain English, its a measure of how much the private sector is spending or will be spending derived from surveys (just like publicly acquired data, e.g ABS Labour Force Survey) of a large group of businesses. Derivations include manufacturing, construction and service PMI.
At MacroBusiness we cover PMI’s (you may notice the data releases coming up in the “Data for the Week” post each Monday) as they provide, as the chart above shows, an indication of the direction of an economy alongside credit/finance figures.
And in Italy, at least, that trend is down.