10/6/16: Italian Manufacturing Capacity post-crisis

A third paper on manufacturing capacity, also from Italy is by Libero Monteforte and Giordano Zevi, titled “An Inquiry into Manufacturing Capacity in Italy after the Double-Dip Recession” (January 21, 2016, Bank of Italy Occasional Paper No. 302: http://ssrn.com/abstract=2759786).

Here, the authors “…investigate the effects of the prolonged double-dip recession on the productive capacity of the Italian manufacturing sector”. The authors “…estimate that between 2007 and 2013 capacity contracted by 11–17%, depending on the method.”

In addition, the authors “…conduct an exercise to quantify the loss with respect to a counterfactual evolution of capacity in a ‘no-crisis’ scenario in which pre-2008 trends are extrapolated: in this case the loss is close to 20% for all methods.”

Summary of the results:

And here is decomposition of the potential output drop by factor of production:

Per authors: “In terms of factor determinants, about 60% of the cumulated drop of potential output in 2007-13 came from labour, while around 25% was attributable to the TFP (Chart above). The reason why the contribution of capital is comparatively small is twofold: first, the industrial
sector is characterized by a large wage share (close to 70%), therefore the contribution of K in the production function is limited; second, capital is a highly persistent variable and the fall in investments recorded during the two recessions, even if remarkably large, has not (so far)
resulted in a dramatic drop of the capital stock.”

The key lessons from all of this are: potential output in Italy fell precipitously across the manufacturing economy in the wake of the Global Financial Crisis. Meanwhile, counterfactual extension of pre-crisis trends was strongly signalling to the upside in manufacturing.

Majority of metrics used suggest that productive capacity in Italy declined by 15-18 percent through 2013, while counterfactual estimates for pre-crisis trend would have implied an average rise of ca 5 percent.

Last, but not least, “Firms producing basic metals, fabricated metal products and machinery and equipment are found to be the ones that were most penalized by the crisis of the last six years; by contrast, sectors that were already shrinking before 2008, such as the manufacture of textiles, appear not to have performed significantly worse during the double-dip recessions than they had in the early 2000s.”