Italy does not export services. The reasons for the decline

23 February 2024 - 17:00

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Although with a negative balance, Germany maintained its world market share of services exports higher than France, Spain, and Italy.

Italy does not export services. The reasons for the decline

The Italian GDP has seen a strong growth in the services sector compared to the other items: industry, construction, agriculture/forestry/fishing. This amounts to approximately 1,400 billion euros for services compared to 400 billion for industry.

The services sector has contributed around 72%-73% of Italy’s GDP since 2009, similar to Spain and ahead of Germany’s industrial sector, but behind France.

It is no coincidence that German industrial production is the only one that has grown, in terms of GDP, since 2007.
However, Germany has seen an acceleration in service exports, greater than the growth in service imports.

This trend has led the Germans to reduce the deficit in the balance of payments. Although with a negative balance, Germany maintained its world market share of services exports higher than France, Spain, and Italy.

Italy has a huge service export deficit compared to potential foreign demand for services. Even though exports, both goods and services, are growing in Italy, it is essential to consider potential foreign demand.
However, the trend is improving, both for services and goods, striving closer to potential foreign demand in recent years.

Italy recorded a positive trade balance since 2022 and is reaching potential demand, this time not thanks to the devaluation of the lira as in the mid-1990s, although in recent years the euro has moved at low levels compared to the dollar.

Compared to the 70s/80s, Italian exports have dropped significantly in Africa, the Middle East and also in Germany and France (from around 38% to the current 23%), opening up towards Asia and China.

The top exports remain machinery, textiles-clothing, transport, electricity. The Italian Institute of Statistics (Istat) underlines that "Italy follows the general evolution of trade in advanced countries, maintaining its specialization oriented towards light industry, with a much greater weight of the textile-clothing-footwear and furniture, furnishings, non-metallic minerals (Made in Italy) and less than the most complex industrial sectors, except for machinery.”

However, the export trend is in constant decline, only China and India have increased market shares, and Spain remains stable. Istat also recalls that "the export performance of the major European economies except for Spain has slowed down further after the peak in 2000. Italy’s exports grew more than that of France but less than Germany, compared to which, however, it recovered the lost ground in the two-year recovery period 2021-2022.”

Italy’s energy insufficiency is clear, as demonstrated by the trade balance. According to Istat, "Italy’s progress in this area has been much lower compared to the other major European economies, with a progressive worsening of the balances."

According to Istat, “the reasons for these trends are to be found mainly in Italian specialization. As in Spain, this has remained strongly anchored to tourism, whose trade has increased less than for services as a whole, has suffered growing international competition, and, more recently, suffered greatly from the fallout of the pandemic, only recovering 2019 levels in 2022. In France and Germany, however, Finance and insurance, ICT, licenses and patents, and other business services have rapidly gained shares, which include research and development, technical and professional consultancy, and marketing services.”

Istat also recalls that "in our country a substantial deficit has opened up in transport services, largely linked to the air sector (where the normalized balance before the pandemic crisis was equal to over a third of total trade). In the most knowledge-intensive component, Italy has maintained a relatively large deficit and growing in the case of financial and insurance services and information and communication services. The deficit has instead closed for intellectual property rights, while Research and Development activities present a growing positive balance.”

Istat underlines that "To summarize, when compared to other major EU economies, Italy is experiencing a reduction in surpluses in the historical areas of specialization in both trade of services and goods. This decline is greater in Italy than in Spain, which shares similar characteristics. Additionally, there is a shift towards products with greater technological and knowledge content, which puts France and Germany in a more favorable position. With exceptions, trade in services in Italy has grown more slowly also due to the low level of activity of our economy: this has contributed to containing deficits which, otherwise, could have been much more significant, but has probably also disadvantaged the development of activities, such as IT and technical services, capable of competing internationally.”

Istat also recalls that "even in 1980, the overall value of the stock of foreign investments in Italy was equal to less than 2% of GDP, and that of Italian investments abroad was of the same order of magnitude. During the 1980s and more rapidly in the following decades, Italy’s productive internationalization continued to grow significantly, albeit at much lower rates than the other major European economies: in 2020, the average between stocks of FDI in the country and of Italian investments abroad was equal to just under 30% of GDP, compared to around 40% in Germany and more than 50% in France and Spain. At the same time, it should be noted that Italy has now become a net investor, albeit to a much lesser extent than France and Germany."

To return to growth and reduce the debt/GDP ratio, Italy has various levers and solutions to implement, one of these is to improve the trade balance of services by satisfying potential foreign demand, trying to mitigate the energy deficit to eliminate total dependence on foreign countries, reverse the declining trend in the world export market share through adequate international agreements and policies (perhaps re-emerging in Africa), continue to push and encourage technological development. Italy, however, must not be a country that creates GDP only thanks to exports and a positive trade balance. The country must recreate internal demand, which is currently absent except in the post-pandemic years.

Original article published on Italy 2024-02-25 07:10:00. Original title: L’Italia non esporta servizi. Le ragioni del declino

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