A recession is essentially a contraction in economic activity within the business cycle where such things as manufacturing, employment, capacity utilization, investment, consumer spending and profitability, to name a few, decline. The generally accepted indicator for defining a recession is two consecutive quarters of declining gross domestic product. With that definition in mind, Italy has fallen back into a recession this year as its GDP fell 0.2 percent in the second quarter, compounding the 0.1 percent decline during the first quarter. In truth, Italy has never fully emerged from a recession in three years. Over the past 12 quarters, it has managed one quarter of growth, with the economy falling by 9.0 percent below its precrisis high.
If you think the U.S. has an extremely inefficient judicial system, think again; you’ll be surprised to know that Italy makes the U.S. look like Usain Bolt running the 200 meters. For example, in the U.S. it takes an average of 370 days to enforce a contract, which may seem like an eternity to you and me, but in Italy, it takes a staggering average of 1,185 days, more than three years. Not only has this snail’s-paced judicial system dissuaded some companies from relocating to Italy and bringing new jobs, but it bogs down existing businesses such as banks who struggle to bring deadbeat creditors to court.
Additionally, companies are reluctant to hire, since it can take more than two years to settle a labor dispute. The list of inefficiencies in the Italian judicial system goes on and on, with the Bank of Italy putting the costs of the poor functioning court system at about 1 percent of GDP annually.
Thankfully, Italian Prime Minister Matteo Renzi has made judicial reform a top priority and is working with lawmakers to streamline the judicial process. Seeing the potential opportunities, some business developers are looking to the future. For example, Australian developer Westfield Corp. plans to start construction in 2015 or 2016 on a 1.8 million-square-foot mall, the size of 30 football fields, in Milan, a project that will take three years to complete.
This week’s top-performing country, while rebounding off its Aug. 7 low, is Italy with the MSCI Italy 25/50 index gaining 4.91 percent over the past five trading days, followed by the MSCI Brazil 25/50 index, up 4.19 percent over the same period. Looking at longer-term trends, Brazil is the top-performing country over the past three months, with the MSCI Brazil 25/50 index rising 14.88 percent.
This article was written byLaif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH).This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.