ITALY'S DEMOGRAPHICS UNDERPINS ITS GROWTH, DEBT, STABILITY & POLITICS
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Research materials for client use only. Not intended for public dissemination. Italian Demographics Spotlight June 2018 | Demographics & Retirement Research Amlan Roy, Global Chief Retirement Strategist, amlan_roy@ssga.com Amy Le, Investment Strategist, Global Demographics & Retirement, amy_le@ssga.com ITALY’S DEMOGRAPHICS UNDERPINS ITS GROWTH, DEBT, STABILITY & POLITICS • Italy’s politics and consequent implications for economics and markets have been receiving a lot of attention from investors, leaders and the financial press. However, Italy’s unique demographics and linkages to growth, markets and stability have received less attention. This short note highlights the importance of Italian demographics and contrasts it with Germany, France and the UK. • We consider demographics to be about more than just ageing or population size. Demographics encompasses a whole set of “people characteristics,” within which we focus on those of people as consumers and workers. Consumer and worker behaviour affects national income (GDP) at a macro level, and corporate profits and individual incomes at a micro level. • Italy is one of the five oldest countries in the world. Its life expectancy at birth is the highest in Europe (83.3 years in 2015). Italy’s population size (56.4m) was larger than France (54.1 m) and the UK (56.3m) in 1980 but is now smaller. Italy currently has the highest median age jointly with Germany (45.9 years in 2015). • Italy’s 80+ aged population has more than tripled over 1980–2015 and it has the highest proportion of people aged 80+ in Europe (6.7% in 2015), second in the world only to Japan (7.6% in 2015). In contrast the young age share has dropped by 11.7% — reflecting the sharp decline in fertility rates (children per woman of child bearing age). • High Italian unemployment rates, and more specifically very high youth unemployment rates, reflect the core reasons for discontent and instability of leadership. Their recent migration flows are unique too in terms of increased emigration and lower immigration. The above-listed demographic features are affecting Italy’s GDP growth, public debt, capital flows, savings and income inequality as well as international competitiveness. Italian demographic dynamics deserve to be considered in a holistic analysis of its prospects — economic, political and social.
Market Commentary | Italian Demographics Spotlight
Spotlighting Italian Demographics Figure 2: Population Growth (%p.a.)
Italy is one of the oldest countries and it has a history of 1.5
great tradition and culture. Its demographics are unique
and not unidimensional; they cover an interesting range
1.0
of features such as life expectancy, age distribution,
gender differences, family composition, consumer and
worker characteristics. These features influence macro 0.5
fundamentals such as growth, public debt, inflation and
income inequality. 0.0
Report Structure
-0.5 1980–1985 1985–1990 1990–2000 2000–2005 2005–2010 2010–2015 2015–2020
Section 1 summarizes Italian core demographics in charts
with some comparisons/contrasts with Germany, France — France — Germany — Italy — UK
and UK. We choose not to contrast with other old countries
as well as US and Japan for the sake of parsimony and focus. Source: UN, SSGA Demographics.
Section 2 focuses on the labour force characteristics.
The most notable trend in Italy is the change in share of
Section 3 presents population change components and the very old 80+ aged people over 1980–2015 as shown in
migration trends. Figures 3 and 4. In 1980, Italy’s share of the 80+ age group
Section 4 presents the demographic drivers of GDP growth. was only 2.2% of the total population, but now this has more
than tripled. At the current level of 6.7%, Italy’s share of the
Section 5 presents ageing related expenditures and fiscal 80+ age group is significantly higher than that of France
deficit/public debt trends. (6.0%), Germany (5.7%) and the UK (4.9%). In contrast, the
Section 6 discusses structure of GDP, Trade, Savings- share of the very young age group (0–19 years) has decreased
Investment Gap and Current Account. across all of these countries but most significantly by 11.7% in
Italy, reflecting the sharp fertility rate declines over the last
Section 7 concludes. two decades. The population pyramids (age distributions)
1. Core Demographic Indicators have become more rectangularised reflecting the ageing
In this section, we compare Italy’s demographic profile with of the population. Note the larger numbers of females
other big European1 countries such as France, Germany and outliving males at the 80+ age ranges, both in 1980 and
the UK. In terms of 2015 population size, Italy is the smallest 2015. Gender parity is needed as we advocated in the
country, as shown in Figure 1. It is important to note that Demographic Manifesto (2000)2 to enable sustainable
compared to France and the UK, it has also had the smallest budgets and adequate living standards for the older
population increase over 1980–2015, due to a combination of advanced countries.
lower fertility rates and higher outward migration relative to
the other three countries. Additionally, it is the only country Figure 3: Italy’s Age Distribution: 1980
that has experienced negative population growth over the Age Group (Years)
last 5 years as shown in Figure 2, a decreasing population
similar to Japan’s. 80+
75–79
70–74
65–69
Figure 1: Population Size (Millions) 60–64
55–59
50–54
92 45–49
40–44
82 35–39
78 30–34
82 25–29
20–24
15–19
72 10–14
64 65 5–9
0–4
60
62 3 2 1 0 1 2 3
56 56
54 Population (Millions)
52 France Germany Italy UK Male Female
1980 2015
Source: UN, SSGA Demographics.
Source: UN, State Street Global Advisors (SSGA) Demographics.
State Street Global Advisors 2Market Commentary | Italian Demographics Spotlight
Figure 4: Italy’s Age Distribution: 2015 A combination of low fertility rates (fewer babies per
Age Group (Years) woman) combined with high life expectancy at birth leads
80+ to a higher old-age dependency ratio (a summary statistic of
75–79
70–74 the ageing burden). As can be seen in Figure 7, the increase
65–69 for Italy is very noticeable. Higher old-age dependency
60–64
55–59 ratios create high fiscal burdens for countries like Italy, as
50–54 we discuss later. In a recent research report, we discussed
45–49
40–44 the need for extended flexible working lives reflecting
35–39 the realities of working and consuming today. Changing
30–34
25–29 working-age boundaries can dramatically lower old age
20–24 dependency ratios3 and this is very much needed, along with
15–19
10–14 other complementary policy measures.
5–9
0–4 Italy also has the largest increase in the number of elderly
4 2 0 2 4 dependents aged above 65 years per 100 working-age
Population (Millions)
population. In 1980, Italy’s old-age dependency ratio was
Male Female the lowest amongst the four countries but today, it is the
highest, followed by Germany (Figure 7). The same feature
Source: UN, SSGA Demographics.
shows up when we look at median ages in Figure 8, where
Figures 5 and 6 present fertility rates (children per woman Italy experienced the largest increase over the last 35 years.
of child-bearing age) and life expectancy at birth. Both
France and the UK have much higher fertility rates than
Figure 7: Old-Age Dependency Ratio
Germany and Italy (Figure 5). However, in terms of life
Number of 65+ Years Per 100 Working Age Population
expectancy at birth Italy is the leader with 83.3 years,
followed by France, the UK and Germany.
40
Figure 5: Fertility Rates 35
35
Children Per Woman of Child-bearing Age 32
30
30 28
2.1
24 23
25
22
1.8 21
20 France Germany Italy UK
1.5 1980 2015
Source: UN, SSGA Demographics.
1.2 1980–1985 1985–1990 1990–2000 2000–2005 2005–2010 2010–2015 2015–2020
— France — Germany — Italy — UK Figure 8: Median Age
Years
Source: UN, SSGA Demographics.
50
Figure 6: Life Expectancy at Birth
45.9 45.9
Years
45
41.2
85 82.8 83.3 40.2
81.3 81.8
40
36.5
80
34.1 34.4
35 32.6
74.6 74.9
73.6 74.2
75
30 France Germany Italy UK
70 1980 2015
65 France Germany Italy UK Source: UN, SSGA Demographics.
1980–1985 2015–2020
Source: UN, SSGA Demographics.
State Street Global Advisors 3Market Commentary | Italian Demographics Spotlight
2. Italian Labour Force Trends Italy’s labour force participation rates, for both male and
Italy’s unemployment rate has always been one of the female, have been significantly lower than those of Germany,
highest in the EU. Figure 9 shows that since 2012, Italy France and the UK. Over the last three decades, there has
has surpassed France to be the country with highest been a decline in the number of men participating in the
unemployment rate. Italy has also had the highest youth labour force in these advanced countries, with the highest
unemployment rate of the four big European countries decrease in Italy, as illustrated in Figure 11. In contrast,
over the last 30 years (Figure 10). The recent financial female labour force participation rates have increased a lot,
crisis has impacted Italy’s youth unemployment rate particularly in Germany. Both the Italian male and female
more significantly than for France, Germany and the UK. labour force participation rates are significantly below those
At 36.6% (2017), Italy’s youth unemployment rate is 17% of the other countries, the decrease in male participation
higher than the EU average — a catalyst for poitical rates in Italy is the highest and the increase in the female
discontent and instability. participation rates is the lowest, suggesting the need for
labour market incentives as well as policy reforms.
Figure 9: Total Unemployment Figure 11: Male Labour Force Participation Rate
% of Total Labour Force %
15 80
74.1
75 72.6
10
70 68.2
66.2 66.9
65.7
65
5 60.7
60 58.4
0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 55 France Germany Italy UK
— France — Germany — Italy — UK — EU 1990 2015
Source: World Bank, SSGA Demographics. Source: ILO, SSGA Demographics.
Figure 10: Youth Unemployment Figure 12: Female Labour Force Participation Rate
% of Total Labour Force Ages 15–24 %
50 60 56.6
54.6
40 55 52.0
50.7
50 46.3
30 45.2
45
20 39.0
40
35.3
10
35
0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 30 France Germany Italy UK
— France — Germany — Italy — UK — EU 1990 2015
Source: World Bank, SSGA Demographics. Source: ILO, SSGA Demographics.
State Street Global Advisors 4Market Commentary | Italian Demographics Spotlight
3. Components of Population Change & Migration Trends
Population change emanates from two sources: (i) natural population change (births less deaths) and
(ii) net migration (immigration less emigration). Figure 13 depicts the changing share of net migration
as a component of total population change. Over 2010–2015, the contribution of net migration to Italy’s
population change (-226 thousands) was -117%. The role of net immigation is much higher in countries
like Germany (219%) and Italy (-117%) than in France (25%) and UK(47%).
Over 2005–2014, the biggest inflows of foreigners in to Italy came from Romania, Morocco, Albania,
Ukraine and China (Figure 14). In 2015, Romania, Morocco and China accounted for largest inflows.
Figure 13: Population Change Decomposed
In Thousands
4,000
3,000
2,000
1,000
0
-1,000
-2,000 1950–1955 1955–1960 1960–1965 1965–1970 1970–1975 1975–1980 1980–1985 1985–1990 1990–1995 1995–2000 2000–2005 2005–2010 2010–2015
Net Population Change Net Migration
Source: UN, SSGA Demographics.
Figure 14: Inflows of Foreign Population by Nationality
% of Total Foreign Population
%
30
25
20
15
10
5
0 Romania Morocco China Bangladesh Albania Pakistan India Ukraine Nigeria Senegal
2015 2005–14 Annual Average
Source: OECD, SSGA Demographics.
As shown in Figure 15, migrants seem to come to Italy and France for two main reasons. The first one is
to gain the ability for free movement within the European area and the second reason is for family, this
is different from UK and Germany where migrants come mainly for free movement within the EU.
Figure 15: Permanent Migration Inflows by Type, 2015
% Distribution
France Germany Italy UK
Work 10.0 4.0 8.6 15.3
Family (Incl. Accompanying Family) 40.4 12.0 30.2 13.0
Humanitarian 6.5 20.9 18.4 4.8
Free Movement 34.4 62.3 39.6 60.5
Others 8.7 0.9 3.1 6.3
Source: OECD, SSGA Demographics.
State Street Global Advisors 5Market Commentary | Italian Demographics Spotlight
Figure 16 shows that the employment/population ratio of Over the last 10 years, increasing numbers of Italian citizens
foreign-born people was slightly higher than the native-born have left Italy and there have been fewer immigrants too.
for both men and women. Also, the unemployment rate of
foreign born is higher than that of the natives in Italy for
both men and women. The female unemployment rate is also Figure 18: Number of Emigrants by Country
bit higher than male unemployment rates. In Thousands
Compared to the other large European countries, Italy’s 800
share of highly educated foreign born 25–64 years
population is the lowest (69.2%) as illustrated in Figure 17.
600
This might translate to lower-skilled immigrants too.
400
Figure 16: Labour Market Outcomes in Italy, 2015
% 200
80 70.0
64.9 0 2007 2010 2013 2016
60 — France — Germany — Italy — UK
46.9 49.0
Source: Eurostat, SSGA Demographics.
40
14.5 17.0
20 11.1 12.0 Figure 19: Number of Immigrants by Country
In Thousands
0 Native-born Foreign-born Native-born Foreign-born
Employment/Population Ratio Unemployment Rate 2000
Men Women
1500
Source: OECD, SSGA Demographics
1000
Figure 17: Share of the Highly Educated Among the Foreign 500
and Native Born 25–64 Years Population, 2015
% of 25–64
0 2007 2010 2013 2016
93 90.0 — France — Germany — Italy — UK
86.8
88 85.6 Source: Eurostat, SSGA Demographics.
83 81.2
79.6
78.0
78 4. Italian Demographics & GDP Growth
In our previous research (drawing on the ECB framework
71.7
73
69.2
of growth accounting),4 we explained that three growth
components fully aggregate up to GDP growth: (i) working-
68 France Germany Italy UK
age population (ii) labour productivity and (iii) labour
Foreign-born Native-born utilization. It is important to understand the dynamics
behind each of these drivers.
Insert Source: OECD, SSGA Demographics
State Street Global Advisors 6Market Commentary | Italian Demographics Spotlight
Figure 20: GDP Growth Decomposition: Italy vs. France, Germany and the UK
Average Annual Growth Rate (%)
5 Real GDP Growth
4 2.4 1.6 1.9 2.0 0.9 1.8 2.1 1.2 1.1 1.7 0.3 -0.1
0.3 0.11
3
0.3
0.2 0.1 0.2
2 0.8
2.8 0.2 0.5
2.5 1.3 0.5 0.4
1 1.8 1.6
1.3 1.1 1.2 0.9 0.1 0.3
0.9
0.4 0.2 0.1
0 -0.4 -0.5 -0.4 0.0 0.0 -0.5
-0.9 -0.2 -0.1 -0.1
-1 1991–2000 2001–2010 2011–2017 1991–2000 2001–2010 2011–2017 1991–2000 2001–2010 2011–2017 1991–2000 2001–2010 2011–2017
UK Germany France Italy
Labour Productivity Growth Labour Utilization Growth Working Age Population Growth
Source: GGDC, UN, SSGA Demographics.
The main driver for lower GDP growth in Italy is the Figure 21: Ageing-Related Expenditures, 2016
negative working-age population growth as highlighted % of GDP
above, caused by lower fertility rates, more emigration and
30
lower immigration. This is symptomatic of perceptions of
1.7
poor future growth potential. While in other countries 25
1.7
the main reason for lower GDP growth was lower labour 1.3 1.6
20 7.9 6.3
productivity growth, in Italy it is a combination of lower 1.5
labour productivity growth and lower working-age 15 7.4 6.8
7.9
population growth.
10 15.6
15.0
As discussed earlier, labour reform to incentivise higher 10.1 11.2
5 7.7
labour force participation, such as creating more jobs to
engage both the youth and well-educated skilled Italian 0 France Germany Italy UK EU28
women returning from having children with appropriate
Public Pensions Health Care Long-term Care
flexible work/part-time policies, would make for a winning
strategy for Italy. This would tackle gender inequality and Source: EC, SSGA Demographics.
youth unemployment while creating growth.
5. Ageing-Related Expenditures and Public Debt
Another macroeconomic problem that compounds some Figure 22: Old-Age Poverty Rate, 2014
of the problems Italy faces is on account of ageing-related % of 66+ Age Group
public expenditures which create fiscal sustainability
15 13.1
strains, a source of concern for investors and other EU
member countries trying to be macro-prudential regarding
12 9.5
debt and deficit guidelines. 9.3
9
Italy’s ageing related expenditures on account of public
pensions, healthcare and long-term care adds up to 23.6%
6
of GDP (Figure 21) a much higher number than the other 3.3
EU28 countries against the bacakdrop of lower growth, 3
lower employment, lower labour participation and
increased ageing. 0 France Germany Italy UK
The poverty rate is the ratio of the number of people (in a Source: OECD, SSGA Demographics.
given age group) whose income falls below the poverty line;
taken as half the median household income of the total
population. Italy’s old-age poverty rate (Figure 22) is higher
than France’s but much lower than that of the UK.
State Street Global Advisors 7Market Commentary | Italian Demographics Spotlight
The generosity underlying Italy’s public pensions refered to Figure 25: Government Deficit/Surplus
above can be cross-validated by its very high Gross Pension % of GDP
Replacement Rate (Figure 23) and its high Gross Pension
Wealth (Figure 24). We believe that there is lot of scope to 5
renegotiate these pensions promises in the future to ensure
fairer intergenerational equity and adequate fiscal 0
sustainability.
As per OECD data, the effective retirement age (62.1 -5
for men and 61.3 for women) in Italy is lower than the
official retirement age (66.6 for men and 65.6 for women), -10
something that is not very good for fiscal sustainability
in one of the longest-lived countries of the world. Workers -15 2000 2003 2006 2009 2012 2015 2017
should be discouraged from early retirement in order to
— France — Germany — Italy — UK
ensure that they work longer, save longer and commit to
labour productivity for longer.5
Source: Eurostat, SSGA Demographics.
Figure 23: Gross Pension Replacement Rate, 2016
Figure 26: General Government Gross Debt
%, Average Male Earners
% of GDP
100
83.1 150
80
60.5
60 100
38.2
40
22.1
50
20
0 France Germany Italy UK
0 2000 2003 2006 2009 2012 2015 2017
Source: OECD, SSGA Demographics.
— France — Germany — Italy — UK
Source: Eurostat, SSGA Demographics.
Figure 24: Gross Pension Wealth, 2016
Multiple of Mean Earnings, Average Male Earners
6. Italy: Trade, Capital Flows & Current Account
15 13.3 Trade interactions between the Italy and Europe are
11.8 significant. Of Italy’s top five export and import markets,
12
representing more than 42% of Italy’s trades, roughly 80%
8.3 come from Europe (Figure 27).
9
6 4.4
Figure 27: Italy’s Top 5 Export and Import Markets, 2016
3 Export Partner Import Partner
Partner Name Share (%) Partner Name Share (%)
0 France Germany Italy UK Germany 12.6 Germany 16.3
France 10.5 France 8.9
Source: OECD, SSGA Demographics.
US 8.9 China 7.5
UK 5.4 Netherlands 5.5
Italy’s public deficit and public debt as a ratio of GDP Spain 5.0 Spain 5.3
(Figure 25 and 26) have been increasing but, while a cause
Source: World Bank, SSGA Demographics.
for concern, are yet not in the alarm zone. There needs to be
policy reform to generate growth and renegotiate long-term
ageing related promises over the near future.
State Street Global Advisors 8Market Commentary | Italian Demographics Spotlight In earlier research by us and others,6 demographics are shown to influence capital flows and current accounts via the savings — investment gap. We remind the reader of these linkages below (Figure 28). Figure 28: Italy’s Savings and Current Account % of GDP 32 4 24 2 16 0 8 -2 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 -4 Current Account Balance (RHS) — Total Investment (LHS) — Gross National Savings (LHS) Source: IMF, SSGA Demographics. 7. Conclusions Italy’s unique demographics as the longest-lived country in Europe, low fertility rates, net migration dynamics has immediate, short-term as well as longer-term implications for economic growth, public debt, inequality as well as flows of capital. These macroeconomic concerns emanating from demographic linkages create fragilities in terms of political stability and unrest. We advocate strong reforms targeted at the labour market to promote greater participation, greater gender equality and higher labour productivity. Intergenerational equity is another concern being faced in Italy, Japan, Netherlands etc. leading to debates over pensions and health reform. The challenges in balancing fiscal sustainability with youth unemployment, income inequality and gender inequality are tough but collective sharing of actions and responsibility is needed to stave off the current strains and avoid future political, economic and market crises. State Street Global Advisors 9
Market Commentary | Italian Demographics Spotlight
1
See UN Population Prospects (2017) and Credit Suisse Demographics Research 2015 “EU’s evolving demographics & pensions need attention.”
2
Credit Suisse (2000), “The Demographic Manifesto: New Jobs, New People” and State Street Global Advisors (2017), “Why Demographics Matter?”
3
State Street Global Advisors (2018), “Global Demographics & Retirement Implications.”
4
Credit Suisse Demographics Research (2009), “A demographic perspective of economic growth.”
5
Credit Suisse Demographics Research (2011), “How Increasing Longevity Affects Us All?”
6
Credit Suisse Demographics Research (2007), “Demographics, Capital Flows and Exchange Rates.”
References
Credit Suisse (2000), “The Demographic Manifesto: New Jobs, New People”
Credit Suisse Demographics Research (2007), “Demographics, Capital Flows and Exchange Rates.”
Credit Suisse Demographics Research (2007), A Demographic Perspective of Economic Growth.”
Credit Suisse Demographics Research (2011), “Spotlighting The European Union’s Demographics.”
Credit Suisse Demographics Research (2011), “How Increasing Longevity Affects us All?.”
Credit Suisse Demographics Research (2011), Macro “Fiscal Sustainability” to Micro “Economic Conditions of the Old” in the “Oldest Five” Countries (2011).
Credit Suisse Demographics Research (2013), “European Demographics & Fiscal Sustainability.”
Credit Suisse Demographics Research (2015) “EU’s evolving demographics & pensions need attention.”
European Commission (2018), Ageing Report.
OECD (2017), “International Migration Outlook 2017.”
OECD (2017), “Pensions at a glance OECD and G20 indicators.”
State Street Global Advisors (2017), “Why Demographics Matter?”
State Street Global Advisors (2018), “Global Demographics & Retirement Implications.”
Unless otherwise stated, all data sourced to “UN” is the most current data attributable to the United Nations Population Division.
Data shown beyond 2015 is a UN projection.
This is intended for Investment Professional use only. Not for Public use.
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