Italian Industry in 1999
1. The international economy and the industrial cycle in the Euro area
The international economy
In 1999 the world economy grew by 3.3% (Table 1), at a higher rate than expected thanks mainly to the sustained growth in the United States and to the cyclical upturn of the economies in South East Asia. World-wide growth was also positively affected by the improvement of the business cycle in Russia and other East European countries and by the better-than-expected performance of Latin American economies.
North America has been the most dynamic area: in the United States GDP grew for the 9th consecutive year (+4.1%), driven by a strong domestic demand (+5.1%), which more than offset the adverse effect on growth of net foreign demand (-1.4%). Private consumption (+5.3%) benefited from the windfall coming from the good performance of financial markets, stable prices as well as relatively low interest rates. Industrial production continued to grow at a good pace (by a yearly average of 4.2%), leading to a further increase of 1.5% in employment (over two million new jobs).
In the European Union, output grew by a yearly average of 2.3%; the contribution to growth made by domestic demand was positive (2,8%) and more than offset the reduction in net foreign demand (-0.5% in terms of contribution to GDP growth). Consumption increased by 2.8% (+3% in 1998), sustained by employment growth, higher disposable income and increased households confidence. The number of employed people increased by 2.1 million units (+1.3%).
A positive contribution to world-wide growth was also made by the reversal in the cycle of Asian countries, hit by the 1997 economic crisis: overall, in the countries of the Pacific (Thailand, Singapore, Indonesia, Malaysia and South Korea) GDP grew by 4.3% after the sharp drop in 1998. Domestic demand recovered, whereas net exports virtually did not contribute to economic growth. The recovery of the Asian economies was favoured by the aid provided by the international community and by expansionary domestic economic policies. Reforms started in the banking and financial sectors, whose crises had caused the fall in economic activities in previous years. The cyclical recovery of the five Asian countries also favoured the Chinese economy, which grew by over 7% during the year, helped also by strongly expansive fiscal policies.
On the contrary, in Japan, after a sharp drop in 1998, GDP grew by 0.3% only. The expansionary policies supported growth in the first part of the year, without generating a permanent improvement. After the 1998 drop (-7.1%) industrial production increased by 0.4%, on average, in 1999. The weakness of consumption, which remained virtually stable, was affected by the restructuring of the economy which led to a further drop in employment levels (-0.7%). Investment also remained weak due to the accumulation of surplus capacity in previous years. The Yen appreciation caused a negative contribution of net exports to growth (the recovery in exports was more than offset by the strong growth in imports).
In Central and Eastern European countries, the economic situation is slowly improving. In Russia signs of a cyclical recovery became more numerous in the last few months of the year, favoured by increases in oil prices: after the sharp fall of 1998, GDP has grown by 3.2% in 1999. Latin America’s recession was less serious than expected (with a GDP reduction of 0.9%). The countries of that area benefited from the depreciation of some currencies (the Brazilian real) and the increases in the prices of raw materials, of which they are major producers.
Th improvement in the international business cycle favoured a recovery in world-wide trade on the one hand and an increase in the prices of raw materials on the other. On average, world trade expanded by 4.6% in 1999, at a faster pace than in the previous year (+4.1%). The volume of trade grew in the second half of the year. US exports continued to grow strongly, while the appreciation of the Yen favoured a recovery of Japan’s imports. The recovery of domestic demand in the newly industrialised Asian countries boosted imports into this area, as well.
The reduction in oil supply agreed upon by the OPEC countries led to an average increase in the prices of crude oil of 42.5% in 1999. Tensions in international prices of fuels, coupled with the continued growth of the US economy and the recovery of the newly industrialised Asian economies pushed up the prices of raw materials (which increased by 12.1% according to the Confindustria index in dollars and by 17.8% according to the Hwwa index). Tensions in international prices pushed up domestic prices both in the United States and in Europe. Consumer-price inflation was 2.1% in the United States, increasing at a faster pace with respect to the previous year (1.6%); in the European Union it was above 1% (1.2% on a yearly average).
The industrial cycle in the countries of the Euro area
In the Euro area GDP grew by 2.3%, on average, in 1999 (Table 2), at a slightly slower rate compared to the previous year (+2.7%). After a period of stagnation in the first two quarters of the year, production accelerated in the summer, sustained by the improvement in the international cycle and the depreciation of the Euro. These two factors contributed to a marked improvement in household and business confidence. The consolidation of growth has been reflected in an increase of exports and investment. Private consumption grew on average by 2.6% (in line with the previous year trend), supported by the still high level of household confidence. The contribution to growth made by net foreign demand turned positive again as of the second quarter, when the downward trend of the actual exchange rate of the Euro grew worse both in nominal and real terms.
Throughout 1999, household confidence continued to be strong; after an initial period in which it worsened, consumers confidence became strong again towards the end of the year (Figure 1), mainly driven by improvements on the labour market and good employment prospects. On the basis of data on sales at constant prices, purchases of durable goods (especially motor vehicles and parts) seemed to have increased remarkably in the first three quarters, and so did purchases of foods, whereas non-durable goods other than foods (especially textiles and clothing) seem to have slowed down.
Gross fixed investment increased by 5%; investment in machinery and equipment grew by 6.6%. The growth in capital accumulation was favoured by the consolidation of world-wide growth and by a number of favourable financial circumstances: despite increases in the second half of 1999, interest rates are actually at historically low levels in Europe and very low compared to those in the United States. Moreover, business confidence showed a continued tendency to improve during the year, which reflected the favourable growth prospects for productive activities and the improvement in orders (Figure 2).
Industrial production excluding construction was markedly slower than in 1998 (+1.6% against 4.1%). The production of capital goods was particularly slower, up by only 1.5% after a 6.8% increase in the preceding year; the production of intermediate goods also grew moderately (up by 1.5% against 3.8% in 1998 and the same applies to consumer goods (up by 1.7% against 3.1% in 1998). The production of durable consumer goods (up by 2.3%) continued to grow faster than non-durable goods (up by 1.5%); the growth of durable consumer goods was positively affected by the good performance of the car market as well as by the deregulation of telecommunications and the development of Internet services. During the year a stagnation period in the first two quarters was followed by a renewed acceleration of production in the summer, supported by the strong increase in companies’ orders (Figure 3). In the first three quarters of the year employment increased by over 1.5% per quarter with respect to the previous year. Employment growth was powered by the good performance in the services and construction sectors. In the total production industry sector, conversely, employment levels stabilised compared to the previous year.
The acceleration of commodity prices on international markets generated inflationary pressures in the Euro area. Production prices, which had gone down by 0.8% in 1998 remained, on average, stable in 1999 (up by 0.1% in industrial manufacturing only). As of March, when oil prices began to rise, industrial indices began to increase again, registering a 4.1% increase on a yearly basis at the end of 1999 (up by 3.5% in the manufacturing industry alone). Pressures on industrial prices were limited only to intermediate goods (Figure 4), which registered a year-on-year growth of 6.4% in December as compared to a much more moderate increase in the prices of final consumption goods (both consumer (+0.5%) and capital goods (+0.1%)). On a yearly average, prices of intermediate goods registered a 0.6% drop (thanks to the decrease in the second half of 1998 and the first months of 1999), while prices of consumer goods increased by 0.2% and those of capital goods by 0.1%.
Increasing prices also brought about an acceleration of hourly labour costs, which grew by 2.2% in the fourth quarter of 1999 (+1.7%, on average, in 1998); increases were particularly high in the services sector (+2% in 1999 against 1.2% in the previous year). The hourly cost of labour grew by 2.3% (+1.7% in 1998) in the industrial sector. The increase mainly reflected the increase in hourly wages, which resulted higher than 2% on a yearly basis. Non-wage costs (social security contributions and taxes), conversely, slowed down. Labour costs per employee increased during the year and, given the very limited growth of productivity, caused a new increase in labour cost per unit of output.
The effective exchange rate of the Euro (Figure 5) depreciated by 5.6% in nominal terms in 1999 (-5.5% in real terms). After the spring the deterioration of the exchange rate was accompanied by a strong acceleration in exports (+3.6% in value). Data on the first 11 months of the year show an increase in the exports of chemicals (+8%), energy products (+3.1%) and machinery and transport means (+2%) and a decrease in food products and other manufactured goods (-0.5%). On a yearly average, the value of imports increased by 7.3%, pushed by a strong acceleration of energy products (+16.5% in the first 11 months). Imports of machinery and transport goods also registered a sustained growth (+10.9%) whereas imports of food products (-7.7%) and non-energy raw materials (-7.1%) decreased. The strong acceleration of imports more than offset the recovery in exports: the trade balance surplus decreased from 81,000 billion euros to 58,000 billion; the trade deficit for energy products and other non-energy raw materials got worse and the surplus on mechanical products and transport means shrank.
The three main industrial economies in Europe
The economies of the three most important European industrial countries showed signs of gradual recovery, even though with some differences (as can also be seen in table 3, which shows some indicators of industrial activity).
France
After a recovery in the spring of 1999, industrial activity gradually accelerated in the second half of the year, spreading to the whole spectrum of activities. The growth in manufacturing was 3% on a yearly average. This was mainly due to the recovery in exports, which started in the second quarter and was in turn fuelled by the recovery in world demand and greater competitiveness due to the devaluation of the Euro. Activity in the sectors producing intermediate goods – badly hit by the crisis in the newly developed countries – recovered in the spring and accelerated in the second half of the year. This dynamism progressively spread to other sectors and especially to those producing capital goods.
Firms stepped up their investment in the second half of the year, benefiting from favourable financing terms. Overall, investment in the industrial sector increased by over 10% at constant prices and was especially strong in sectors producing consumer goods. In addition to the modernisation of equipment (especially computer-based equipment at the start of 2000), investment focused on increasing production capacity. In 1999 the plants utilisation rate reached a cyclical pick. In some sectors there were tensions in the labour market.
The second half of the year was characterised by a return to the creation of new jobs in industry (+0.3%, on average, in 1999), which was the best result of the decade. Employment in construction increased (+1.4%) for the first time after ten years. Households were particularly sensitive to the improved situation in the labour market and their confidence indicator reached historically high levels. Consumption was strong throughout the year due to purchasing power increases and greater reliance on credit.
Germany
The cyclical upturn registered in Germany in 1999, was sustained by a relatively robust domestic demand, characterised by a constant increase in capital spending in machinery. GDP grew by a yearly average of 1.5%, with employment registering a slight increase of 0.3%. In the early months of the year, the relative weakness of international demand penalised the industrial sector, which is more markedly export-oriented; however, in the second half of 1999, industrial production picked up, led by the recovery in foreign demand. On a yearly average, industrial production (excluding construction, which stagnated) registered a 1.2% growth.
Looking to each individual industry one can see highly differentiated behaviour. In the car industry, recovery started in the second quarter. Even though the performance of production was positive (+3.5%),on a yearly average it was lower than that in 1998, which was a boom year for that sector (+15.7%, with a 17% increase in sales abroad). The recovery affected also the chemical industry, one of the most damaged sectors. In this case, the foreign market played a decisive role, fuelling a demand for intermediate goods to build up stocks of inputs. The production of consumer goods (cosmetics, detergents and toiletries) was also fuelled by foreign demand, while domestic demand stagnated. The production of pharmaceuticals showed signs of recovery as well, after the stagnation due to the health reform. On the whole, chemical production increased by almost 5%.