Why I’m Not Worried About Italy’s Economy

With all the doom and gloom about Europe’s economy and the debt crisis, some recent statistics from the Italian Central Bank caused me to reflect that despite its problems, the Italian economy is more robust than one might think because of its strong performance when it comes to private wealth. 

While the United States and the United Kingdom have had balance sheet recessions, Italy has emerged relatively unscathed on this front.  Based on the Banca D'Italia's Household Wealth in Italy 2010, the ratio of net household wealth to disposable income in Italy did not fall during the Great Recession and indeed by 2009 was the highest among the G-7 countries.  As the accompanying figure shows, when it comes to household wealth, there seems to be a case for Italian exceptionalism.  The worst performer in 2009 is the United States with a household net wealth to disposable income ratio of only 4.9, with the next worst performer being Canada at 5.5.  Italy was at 8.3.  Italy may have public sector finance and efficiency problems but its household sector definitely seems to be in good shape.  The secret?  Low debt.  The ratio of household financial liabilities to disposable income is the lowest among the G-7.  The Italian public sector needs to emulate that type of prudent behaviour.  By the way, Canada does not seem to be that sterling on the financial liability to disposable income front.

Comments

[Ryan]

That second graph doesn't tell us much, though. I can decrease my liabilities-to-disposable-income by moving into a converted storage unit with a space heater and eating nothing but Ramen Noodles. Liabilities plummet, disposable income skyrockets, quality of life goes down the crapper.

I am more interested in the ratio of liabilities to either wealth or total income. That is *almost* what your first graph tells us, but only in a roundabout way. Presumably disposable income is something like (1 - X)y, where X is the percentage of non-disposable income and y is income.

Now that would tell us something. These graphs seem to be camouflaging all the good info.

[Bob Smith]

Livio,

To what extent are the differences in private net debt a function of different age structures? It strikes me that some of those countries are much older than others (Italy and Japan at one end, the US and Canada at the other). All else being equal, you'd expect older countries to have more assets (up to a point, I suppose, at some point they start running their wealth down) and less debt.

[Jacques René Giguère]

IIRC, Italians save much more before buying a house than we do, and live with their parents, as my Italian friends do. Most of these savings are in the form of government bonds, Italians using the gov't as a bank. That's why the panic about "high" Italian gov't debt is so misplaced.

[Livio Di Matteo]

Bob:
That is a good point - Italy does apparently have an old demographic structure (I guess relative to Canada or the US) and there have been concerns about population decline. They have also had some recent immigration though I'm not sure it has been enough to offset the issues of aging.

[Declan]

Maybe I'm confused but isn't the first graph just measuring leverage? Is more leverage a good thing?

[Diogenes Diode]

I'm not sure net worth/disposable income means much of anything. For example, if your disposable income goes down, that ratio goes up. Bet Italian disposable income went down more than net worth.