ITALY’S slow economic recovery since 2014 is finally gathering pace, but the upturn is likely to prove short-lived as few, if any, of its structural problems have yet been fixed.

Those Italian companies that are internationally competitive are performing strongly and hiring staff, helping gross domestic product to jump 0.5 per cent in the first quarter.

But long-standing weaknesses — ranging from red tape and corruption to underinvestment in education and a huge public debt — remain. This suggests the upturn is merely part of the business cycle and risks fading once temporary factors, such as government employment incentives and ultra-low interest rates, start falling away.

Still, the Standard & Poor’s agency raised Italy’s sovereign credit rating last month for the first time in 35 years, citing improved growth prospects supported by rising investment and employment. This surprised many observers, and yet data in the euro zone’s third-largest economy is beating expectations.

Business morale is at its highest for a decade, industrial output rose in August for the fourth month running, export volumes climbed 2.8pc in the first eight months and GDP is forecast to grow this year at its fastest rate since 2010.

“Business is going very well,” said Gaetano Bergami, the owner of BMC, a medium-sized company based in Bologna which makes air filters for cars and motor-bikes which it exports to more than 90 countries.

The nation’s jobless rate of 11.1pc and its youth unemployment at 35.7pc remain among the highest in the European Union

“We are growing internationally because BMC is part of that 30pc of Italian firms with competitive products,” he said.

The company recently hired around 10 workers to bring its total Italian workforce to 96, and its turnover has risen steadily to an estimated 12 million euros this year.

Economy Minister Pier Carlo Padoan estimated this week that growth bounced back to 0.5pc in the third quarter after slipping to 0.3pc in the second. “The recovery is consolidating and GDP growth is getting more robust,” he said.

However, BMC and similarly successful firms which managed to thrive even during Italy’s double-dip recession between 2008 and 2013 mask the country’s overall lack of competitiveness.

Italian labour productivity — measured as output per hour worked — has been stagnant for the last decade and is the weakest in the European Union after Greece, according to Eurostat data.

So-called “multi-factor productivity”, which measures the overall efficiency of an economy, has been equally dismal and actually fell 0.2pc in 2016, according to the Organisation for Economic Cooperation and Development.

Italy’s jobless rate of 11.1pc and its youth unemployment at 35.7pc remain among the highest in the EU.

Unhealed wounds

Italy is being tugged along by strong European and global growth but it remains the euro zone’s most sluggish performer.

Not only did the economy contract far more than its euro zone partners following the global financial crisis, losing about 9pc of its GDP between 2008 and 2013, but its subsequent rebound has also been less pronounced.

Prime Minister Paolo Gentiloni has taken care not to raise unrealistic expectations. “Finally we are in a phase of economic recovery but we mustn’t overstate it or imagine that the wounds opened by the crisis have healed,” he said last month.

The International Monetary Fund forecasts the economy will grow 1.5pc this year, which is strong by Italian standards and in line with Rome’s own estimate. But it is still the lowest projected growth rate of any EU country, and the IMF forecasts the gap between Italy and its partners will widen next year.

“It’s hard to imagine Italy growing more than the other European countries,” Roberto Perotti, economics professor at Milan’s Bocconi University, told Reuters.

Perotti said that labour reform, attempted most recently in 2015 by Gentiloni’s predecessor Matteo Renzi, has been the only structural change in the economy of recent years. “It’s not clear if that has made things better or worse,” he added.

Now monetary and political clouds are gathering. From January, the European Central Bank will begin scaling back its purchases of government bonds which have been aimed at stimulating the euro zone economy after the global crisis.

‘Doping the economy’

A tax cut for low earners, worth 80 euros a month, was introduced in 2014 and followed in 2015 by fiscal incentives for firms to hire workers on permanent contracts. More temporary tax breaks were granted this year for companies that invest in new machinery and research and development (R&D).

Bellco, a northern Italian company that makes dialysis machines and employs more than 300 people in Italy, took advantage of the incentives by investing 13 million euros in machinery this year and 10 million in R&D.

General Manager Luciano Frattini said Bellco’s US-based parent company had chosen Italy for the R&D investment due to the tax break. “I think these measures encourage foreign investments in Italy,” he said.

While companies welcome such windfalls, critics say they offer no long-term benefits. “Doping the economy in this way is terribly dangerous,” said Perotti at Bocconi University. “Experience shows that when the incentives end, investments collapse.”

The 2015 hiring incentives, for example, created a temporary surge in workers employed on open-ended contracts, but permanent hiring petered out as soon as the incentives expired.

Of 387,000 new hires in the last year, 94pc were on precarious, temporary contracts of exactly the kind that Renzi’s “Jobs Act” was supposed to overcome.

Francesco Seghezzi, from the Italian labour market think tank ADAPT, said layoffs may rise next year when companies have to start paying welfare and pension contributions for the workers they hired cheaply in 2015 and 2016.

The withdrawal of ECB stimulus is not the only threat facing Italy next year. Elections must be held by May and opinion polls point to a hung parliament and political logjam.

“The country will be ungovernable,” said Perotti. “We will probably end up with a broad coalition that takes decisions to try to satisfy everyone, and that will be damaging for Italy.”

Published in Dawn, The Business and Finance Weekly, November 12th, 2017