Chi Non Saltare…

Story Highlights:

• Italy's Q2 2008 GDP contracted 0.3%.
• Contractions aren't fun for single nations, but Italy is only 3.9% of the global economy—too small to matter much globally.
• Global results are far more important than any single country, and signs point to continued global expansion in Q2 and beyond.

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There's not much the world agrees on these days. From the age-old Metric vs. English System debate to controversy over the US Olympic team's swimsuits, global dissent is alive and well. Except in one area, that is. From the four corners of the Earth and everywhere in between, most folks seem to agree the world's heading into a recession.

The evidence for this has been, for the most part, anecdotal—until now.

Italian Economy Shrinking Again
By Staff, BBC News

With Italy's GDP contracting in the second quarter, the numbers finally seem to support a global recession.

Or do they? The fear is where Italy goes, Germany will follow, as will Europe, then the world. But how does that make sense? After all, Italy only represents 3.9% of the global economy*—the idea that a small contraction in Italy's GDP can tank the global economy isn't even the teensiest bit commonsensical. And, Italy's second quarter decline was only -0.3%—not great for Italy, but what's the difference, really, between -0.3%, 0%, or 0.3%? It's just a fraction of a percentage point's swing and it hardly matters, particularly when considering the tiny scale of those few Italian fractions of a percentage point globally. That miniscule drop is more than made up for by continuing growth in the developing world and elsewhere. Heck, the initial second quarter growth reports for the far larger US economy more than cancels the Italian decline.

Italy is simply too small to drag the rest of the world down with it. Think about it: If small countries alone had a great impact on the global economy, there'd be far more space devoted to Sweden's 0.7% Q2 growth. By the same token, if Italy were truly an important contributor to global GDP, why is this the first time we're seeing headlines about its growth? Did it not matter when it was up 1% in Q4 2006?* When the biggest news out of Italy for the last two years involved trash heaps in Naples and soccer drama, it's a good sign that, economically at least, Italy is too small to matter much in the global big picture.

This is why it's important to focus on the whole global economy, rather than individual countries. If you pay attention to only one country, you risk judging the world's health based on what could be an outlier. Italy is no more a bellwether for the world than China's 10.1% Q2 growth. Only by looking at the whole can we get an accurate view of how things really are.

Things just aren't as bad most folks think. The US, UK, Germany, and China posted positive growth in Q2—contrary to expectations. Results from the rest of Asia and the Eurozone are due later this week, and while some individual countries may have better or worse results, the overall trend of aggregate global growth looks set to continue, thanks in part to a developing world that continues its unprecedented expansion. This aggregate growth, not just Italy's, is what will matter. Any notions otherwise should be given a swift head-butt or be kicked to the curb with the rest of Naples' trash.

*Sources: IMF, Thomson Financial Datastream