Must-know: Italy’s economy

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Overview: A guide to investing in the PIIGS nations (Part 7 of 15)

(Continued from Part 6)

Italy’s economy

Italy has a very high public debt ratio. It was 133% of the gross domestic product (or GDP) in 2013. This figure is expected to peak at 135% of its GDP in 2014. Higher economic activity is expected to put public debt on a declining trajectory. However, another opinion is that a combination of no growth and dis-inflationary pressures will cause Italy’s national debt to increase as a share of its national income. As a result of higher economic activity and higher national income, Italy’s public debt ratio may not see the expected decline.

Trapped in a vicious circle

At a time when unemployment is slowly falling in Spain, Ireland, and Portugal, it stands at 12.3% in Italy. High unemployment means weaker domestic consumption, less supply of and demand for credit, and less tax revenue for the state. This leads to a weak government, growing social unrest, and poor economic activity.

In other words, Italy has entered a vicious circle. This also implies an ongoing threat to Italy’s banking sector because companies and households find it harder to pay back their loans.

The lack of economic progress has followed. The political will to implement structural reforms has been weaker in Italy compared to other countries. When Italian Prime Minister Matteo Renzi took over the Italian government in February, he promised to introduce one reform each month to reactivate Italy’s stagnant economy. He announced ambitious labor and tax reforms to revive growth in order to curtail Italy’s $2.7 trillion debt burden.

However, the progress has been slow. Italy’s political system is so fragmented that Matteo Renzi saw some members of his own party vote against his proposals.

Italy has been behind the other border countries in the recent recovery in domestic demand. In the second quarter, Italy’s GDP data was very poor. This implies that Italy is in recession again. Those investing in Italy through exchange-traded funds (or ETFs) like the iShares MSCI Italy Capped Index Fund (EWI) should remain cautious of their holdings.

ENI SPA (EIPAF) is the only stock in the fund that has double-digit allocation in the fund—equivalent to 16.91%. The fund’s other top holdings include ENEL Ente Nazionale per L’Energ Elet SPA (ESOCF), Intesa Sanpaolo (IITSF), and UniCredit SpA (UNCFF).

Continue reading the next part of this series to learn about Italy entering its third recession in six years and how the market reacted to it.

Continue to Part 8

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