Macroeconomic Concepts And Italy's Recession: An Analysis

Identification and Discussion of the economics concepts and models that will be suitable for analyzing the news article

Write an essay on Macroeconomic Concepts to Real World Events?

Macroeconomics is the subset within economics which is concerned with large-scale, economy-wide events, such as gross domestic product, national income, unemployment etc.

The article referred to in this essay is “Italy Still Stuck In Recession But Sees Growth Next Year” (by Giada Zampano- The Wall Street Journal) where the macroeconomic concept that has been focused on is that Italy is a Recessionary Economy and a forecast provided as to how its Gross Domestic Product, Budget Deficit, Debt-to-GDP ratio and Employment scenario is further expected to change based on governmental macroeconomic measures. In the essay, the repercussions of a slowing economy as well as the reasons why the economy has been reduced to such a sluggish state will be discussed.

In order to understand the changes in the Italian economy, the concept that is vital is the concept of a recessionary economy. It can be defined very technically as a slowing down of economic activities of a nation due to falling GDP rates in two, or more than two successive quarters of a year. However, it is also believed that a recession is only a natural phase in a business cycle where after a period of growth, a recession is expected which can last from between a period of six months to one and a half years.

Recessions generally come about as a lack of trust in the economy. People tend to spend less, which automatically translates to reduced demand for commodities, leading producers to cut the production and halt the supply flow. As manufacturing falls, there is lesser need for labor at the decreased capacity of production. Therefore increased unemployment occurs.  (Culpepper 2014)

However, there can be specific events that lead to a country’s sluggish economic growth. As an example, we can cite the US housing prices. They have been rising for years prior to 2006 after which the value of property started declining. People who had taken on huge loans found it hard to repay them, and banks found it immensely difficult to cope with the large number of foreclosures and increasing number of defaults.

The second concept within the article is that of the Gross Domestic Product or GDP. GDP is a vital primary indicator which is used to determine a country’s economic condition and the quality or standard of living of its people. It is the value in monetary terms of the total number of finished commodities and services over a specific period of time. GDP can be measured using two methods- the income method or the expenditure method. (Brandolini 2014)

Application of the economics concepts and models identified to show understanding of the news event

In September 2014, Italy’s GDP was expected to decline by 0.3 %. This was the 14^th successive quarter in Italy’s economic history which showed no substantial growth, primarily due to the fact that although there were increased exports, it was countered by very poor domestic demand. Italy has been one of the slowest growing nations, economy-wise, for over a decade within the Euro-zone.  (Fiske 2014) Further forecasts imply no growth even in the recent economic future. Considering the entire year 2014, GDP fell by 0.4%, considering adjusted work-days. This was the third consecutive fall in GDP, after dropping to 1.9% in 2013 and prior to that by 2.3% in 2012.  (It’s the end of a three-year recession, GDP growing 0.7% in 2015, says Istat 2015)

A sudden and unexpected hike in import rates was one of the important reasons that led to lowering the GDP rates. However this increase could be temporary as there is very poor domestic demand. A weak domestic demand will eventually drag down the surge in exports. ('Italy' 2015)

Another reason for Italy being a recessionary economy and thus with low levels of GDP is the fact that Italy’s debt-to-GDP ratio is massive, falling only behind Greece in the euro-zone. With GDP levels increasingly declining, it automatically triggered an alarm among investors regarding investment possibilities in Italy since they were not sure if the nation could pay back their due interest payments without drowning under more debt. Increased cut-offs make it far more costly than what an investor is ready to pay as extra collateral for purchasing and selling bonds. (Castellani and Zanfei 2007).

Low productivity is a fundamental issue in the identity of Italy as a recessionary economy. Workers in Italy have worked for increasingly long hours while contributing very less to its value. According to the International Monetary Fund, there was excessive rigidity in the economic structure of Italy with very less involvement in increasing research and developmental activities. There is very less substantial capital structure within the nation, as small and medium business enterprises are a majority within the economy. (Crosnoe 2014) There is hardly any competition since these businesses do not have sufficient funds for technological advancement. These businesses focus on clothing, cheese etc. which cannot compete with the Asian giants like China on the basis of wage rate which is much lower in Asian nations hence benefitting their economic health. Unlike other nations in the euro-zone, Italy has also not been able to diversify into high-tech industries. (Bužinskienė and Rudytė 2015)

Conclusion

Italy’s labor conditions are highly inflexible. There is increased protection for older employees who due to rigid employment laws cannot be fired. Meanwhile, the younger generations among whom unemployment rates are extremely high, keep changing jobs on short term contracts. This sort of rigid structure leads to decreased efficiency and lower labor productivity. Further combination of factors such as poor educational and managerial facilities, combined with poor incentives has led to lower labor productivity (Lifeinitaly.com 2015).

Italy has been forecast to be one of the forerunners in the euro-zone post its formation after collaborating with Germany but instead the failures of the euro have affected Italy adversely. It has led to surge in Italian bonds leading to increased charges on interest rate. Therefore, despite Italy having large surplus in primary budget, they are finding it hard to decrease debt-to-GDP ratio. (Reinhart and Rogoff 2010)

Prevalence of a booming black market and the fact that almost 15 % of all Italian economic activities are related to it and other such underground market institutions is a cause for such severe economic meltdown. (Sabia 2015)

The measures which are to be harnessed to tackle Italy’s falling GDP rates can be summarized to a few external advantageous growth measures. For example, the asset purchase program of the European Central Bank. Interest rates will be lowered as a result of this measure. Measures should be taken for depreciation of the Euro which will boost export rates for the country (Zampano 2015). Also, reduction of oil prices such that there is reduced expenditure on costs for both families and firms. These measures should slowly recuperate the GDP condition within the nation.

However, there are differing opinions as to the effectiveness of the above mentioned policies, since Italy has very rigid structural issues pertaining to labor laws, its legal and education system, conditions often worsened by a high amount of corruption. (Merlo 1998)

Conclusion, highlighting key points and arguments in the essay.

 Coming to a conclusion of the essay, it can be said that a recessionary economy like Italy, is the product of many economic factors. These stem from the root cause of low GDP levels as a result of poor productivity of both small and medium enterprises as well as labor; due to poor technological advancements as well as rigid and inflexible labor and legal laws reducing efficiency further (Economicshelp.org 2012). Thus prevalent macroeconomic events like Italy’s economic condition can be evaluated on the basis of concepts such as governmental influences on markets, GDP, concepts of jobs and inflation as well as various fiscal and monetary policies to combat present issues.

Reference:

1)Reinhart, Carmen M, and Kenneth S Rogoff. 2010. 'Growth In A Time Of Debt'. American Economic Review 100 (2): 573-578. doi:10.1257/aer.100.2.573.

2)Castellani, Davide, and Antonello Zanfei. 2007. 'Internationalisation, Innovation And Productivity: How Do Firms Differ In Italy?'. The World Economy 30 (1): 156-176. doi:10.1111/j.1467-9701.2007.00875.x.

3)'Italy'. 2015. Quarterly National Accounts 2014 (4): 158-163. doi:10.1787/qna-v2014-4-18-en.

4)BužinskienÄ—, Rita, and Dalia RudytÄ—. 2015. 'The Impact Of Knowledge Generating Investment On GDP Growth'. Economics And Business 26: 9. doi:10.7250/eb.2014.014.

5)Merlo, Antonio. 1998. 'Economic Dynamics And Government Stability In Postwar Italy'. Review Of Economics And Statistics 80 (4): 629-637. doi:10.1162/003465398557717.

6) Crosnoe, Robert. 2014. 'Youth, Economic Hardship, And The Worldwide Great Recession'.Longitudinal And Life Course Studies 5 (2). doi:10.14301/llcs.v5i2.296.

7) Fiske, Susan T. 2014. 'Social Psychology And The Great Recession: Comment On Bridging The Gap'. Analyses Of Social Issues And Public Policy 14 (1): 214-216. doi:10.1111/asap.12064.

8) Sabia, Joseph J. 2015. 'MINIMUM WAGES AND GROSS DOMESTIC PRODUCT'. Contemp Econ Policy, n/a-n/a. doi:10.1111/coep.12099.

9) Culpepper, Pepper D. 2014. 'The Political Economy Of Unmediated Democracy: Italian Austerity Under Mario Monti'. West European Politics 37 (6): 1264-1281. doi:10.1080/01402382.2014.929334.

10) Brandolini, Andrea. 2014. 'The Big Chill: Italian Family Budgets After The Great Recession'.Italian Politics 29 (1): 233-256. doi:10.3167/ip.2014.290114.

Zampano, Giada. 2015. 'Italy Still Stuck In Recession But Sees Growth Next Year'.WSJ. https://www.wsj.com/articles/italian-government-confirms-it-will-remain-in-recession-this-year-1412106516.

Links to Pictures related to article:

Economicshelp.org, 2012. 'Italian Economic Decline | Economics Help'.

Lifeinitaly.com,. 2015. 'Italy To Pull From Recession In 2015, GDP -0.3% This Year | Italy'. https://www.lifeinitaly.com/news/italy-pull-recession-2015-gdp-03-year.

It’s the end of a three-year recession, GDP growing 0.7% in 2015, says Istat,. 2015. 'It’S The End Of A Three-Year Recession, GDP Growing 0.7% In 2015, Says Istat'.