Can the economy of Italy throw off its past shackles?

It is time to take another look at how the economy of Italy is performing and first let me point out that the backdrop is good. What I mean by that is that the outlook for the Euro area is currently rather good with this being reported by Markit at the end of last week.

Eurozone economic growth gathered further momentum in March, according to PMI® survey data, reaching a near six-year high…….The March flash PMI rounds off the best quarter for six years and signals GDP growth of 0.6% in the first quarter

That has been followed this morning by better news on the inflation front for March as lower petrol and diesel prices have pulled back both Spanish and some German regional inflation from the February highs this morning. Actually Spanish inflation seems very volatile and therefore difficult to read but this month’s picture seems lower than last even allowing for that. But overall there seem to be some economic silver linings around albeit that there was a cloud or two as the credit data lost some momentum.

What about Italy?

The sentiment numbers here released yesterday were positive as well.

With regard to the consumer survey, the confidence climate index grew in March 2017 from 106.6 to 107.6……With reference to the business surveys, the composite business confidence climate index (IESI, Istat Economic Sentiment Indicator) increased from 104.3 to 105.1.

However there was something rather Italian in all of this good news as I note this.

while the personal and current components worsened from 102.1 to 101.0 and from 104.7 to 104.5

Whilst the outlook is favourable it does not seem to have impacted so far on Italians themselves.

What about industry?

On Tuesday the Italian statistics office served up a swerving serve that Roger Federer would be proud of as its headline showed both industrial turnover (1.9%) and new orders (8.6%) rising. But if we look deeper as there were 21 days this year as opposed to 19 last we see this.

In January 2017 the seasonally adjusted turnover index decreased by -3.5% compared to the previous month (-2.3% in domestic market and -5.4% in non-domestic market)……..In January 2017 the seasonally adjusted industrial new orders index decreased by -2.9% compared with December 2016 (-6.6% in domestic market and +2.6% in non-domestic market).

So it was a bad January meaning that quarterly growth fell to 1.7% for turnover and 0.8% for new orders.

If we look for context of the Italian problem we see some of it in the underlying index which was set at 100 in 2010 and has now risen to 100.3. If we look further we see another sign as the growth has been export-led (121.7) whereas the domestic market has fallen to 91.5. Thus the domestic numbers are more depressionary than recessionary.

If we move to production we see that it fell by 0.5% in January leaving it at 93.8% of the level seen in 2010.

Retail Sales

If we look at the latest data we see that the better sentiment has yet to impact here.

In January 2017 the seasonally adjusted retail trade index increased by 1.4% with respect to December 2016 (+2.3% for food goods and +0.8% for non-food goods). The average of the last three months compared to the previous three months was unvaried. The unadjusted index decreased by 0.1% with respect to January 2016.

The underlying index returns us to thoughts of an economic depression as this time an index set at 100 in 2010 compares to 95.7 in January.

Employment and Unemployment

This continues a rather troubled pattern so let us start with the good bit.

The labour input used in the economic system (expressed by the hours worked in the national accounts) increased by 0.4% quarter-on-quarter and by 1.6% year-over-year.

So there is more work around but because of the past pattern it is hard to look past this.

The unemployment rate confirmed at 11.9%, up by 0.2 percentage points after the substantial stability over the four previous quarters.

Some of that is technical as the particpation rate rose reversing for example some of the arguments over the US labour market but it is also true that the previous year saw unemployment rise by 108,000. So we see that this problem is persisting when if we look at other metrics it should not be.

Also we get a clue perhaps as to the current issues with retail sales as we note that real wages are under pressure.

as a result of a 0.2% increase in wages ( in 2016).

 

Population

The numbers for 2016 are out and they tell us this.

The population at 1st January 2017 was estimated to be 60,579,000; the decrease on the previous year was 86,000 units (-1.4 per thousand).

This happened in spite of the growth from migration.

The net international migration in 2016 amounted to +135 thousand, a similar level to that seen in 2015. Compared to the latter it was determined by a higher number of inflows, 293 thousand, and a new record of outflows, for the recent time, equal to 157 thousand.

As we see people are leaving but are being replaced and some presumably mostly by those crossing the Mediterranean.

Also the demographics clock continued to tick. However let me also welcome this as people are living longer.

The mean age of the population at 1st January 2017 was 44.9 years, two tenths more than in 2016.

The banks

This has become a little like the never-ending story. After all what news is there some 3 months down the road after the announcement of a bailout for Monte Paschi. Well according to Bloomberg there are ongoing arguments.

In the view of some ECB Supervisory Board members, while Monte Paschi cleared the hurdles for aid, its viability was bolstered by unrealistic valuations of its bad loan portfolio, the people said. The board gave the all-clear even though the possibility that Monte Paschi sold junior bonds inappropriately to retail investors wasn’t fully reflected in the solvency assessment, they said.

There is also the issue of what will happen to Banca Popolare di Vicenza and Veneto Banca. The official view is that this will be solved “soon” which is a line they also use for Greece.

Also remember the Atlante bailout fund which was supposed to rescue things which rather embarrassingly was followed by Atlante 11 as it needed more funds, how is it going? From Teleborsa.

Intesa Sanpaolo is not prepared to add other loans in the Fund Atlas. It does not leave space for imagination Carlo Messina, CEO of the banking group……..”There is no doubt that today the one to which we must aim is to safeguard the investment made in Atlas “

Perhaps he is worried by this in 24 ORE.

Altogether, as reconstructed by Radiocor Plus, the adjustments made by the top 12 Italian banks that have joined Atlas amounted to 1.01 billion, compared with 1.98 billion actually paid into the fund on December 31 last year (about l ‘ 80% of the 2.45 billion total commitment declared by the main institutions). Less than a year after the birth of the fund, the average write-down was then 51.2% of actual amounts paid.

Comment

As ever there is much to consider and if we look at the forecast of the Bank of Italy against what is for once a favourable backdrop I am reminded of the “Girlfriend in a Coma” theme of Bill Emmott.

We expect GDP to expand, on an annual basis, by 0.9 per cent this year and the next and by 1.1 per cent in 2018 and 2019.

This reinforces my theme that even in the good years Italy manages around 1% economic growth which means that by the time we allow for downturns it is on a road to nowhere. Actually that explains its experience in the Euro area and as the population has grown it has seen GDP per capita fall by around 6%.

If we move to the banking sector we see something very sclerotic which is plainly holding the economy back as we not even the official data shows Non-Performing Loans at 16.24% of the total. If it is true that the Monte Paschi numbers have been “massaged” (again…) then I fear for what the real number is. Yet real reform never seems to actually turn up as we mull another apparently never-ending story.

 

 

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15 thoughts on “Can the economy of Italy throw off its past shackles?

  1. I would have though the question would be

    Can the ECB and Germany afford to bail them out now the UK has flow the roost ?

    how much of the EIB debt is Italys and will the EU chase us to repay?

    Forbin

    • Hi Forbin

      Well the ECB has bought 233.7 billion Euros of Italian government bonds and if we recall the first rule of ECB club ( that it must always be repaid) that poses a question or two. As to the European Investment Bank it is one of the big four including the UK, France and Germany who are each about 16% of its backing which of course is ever more leveraged.

      We are rattling up some large numbers already…

    • “Can the ECB and Germany afford to bail them out now the UK has flow the roost ?”

      I don’t see why not? The second question brings another – as the UK is flying the roost will the outstanding loans from the EIB and EIA to UK companies be recalled? Then there’s the UK companies benefiting from EU grants to consider and what will happen to those grants going forwards……..

  2. Excellent blog, Shaun.
    I cannot help thinking, notwithstanding some temporary and small glimmers of growth, that there is almost no good scenario for Italy.
    There seems to be a fatal combination of
    1. A declining population
    2. An ageing population
    3. An economy that seems unable to produce a real growth spurt
    4. A very damaged banking system, which in turn leads to lower lending for real businesses to grow
    5. Enormous government debt
    I love Italy as a place to go but I feel that long term decline is irreversible unless something radical happens

  3. If it is true that the Monte Paschi numbers have been “massaged” (again…) then I fear for what the real number is.

    Numbers massaged? … I’m shocked, shocked to my very core by this simply outrageous suggestion! Next you’ll be informing us that gambling has been going on here.

  4. Italy can’t compete with the former Warsaw pact countries, many of whom also are reportedly less corrupt despite 45 years of slavery enforced by communist dictatorship. Being in the euro makes it harder for Italian administration when trying to align costs with productivity – but determined competent politicians have proved this is possible (Hartz 4 was harsh but now Germany is reaping the benefit of these tough measures).

    I see corruption as a major part of Italy’s problems. They offer an example of what happens when you elect a flamboyant oligarch who claims business skills. Berlusconi got rich and Italian finances suffered ….

    • Hi ExpatInBG

      I am reminded of Berlusconi each time I go to Battersea Bridge Road as there is a big restaurant on it called “Bunga Bunga”. Transparency International has Italy at 60th out of 176 countries and that whole zone of SE Europe does badly with Macedonia looking the worst at 90th. We can too and fro about exact numbers but the picture in that part of the world is not good.

  5. Hi Shaun, I know you like and care for Italy. Me too, Im going back in early June on a road trip in my red italian sports car, hopefully surfing around the cinque terra. I’ll tell you what I see, but I’m not holding out much hope, last time it was cheaper off the beaten track than the UK evwm given the exchange rate!

    • Hi Paul

      Yes I do and I note that your car has given Italy a bit of well needed business. This issue of relative prices seems to be somewhat divorced from inflation rates as this on Twitter about Dublin reminded me earlier.

      Mind you capitals often are a law unto themselves, but Ireland is supposed to not have had any inflation for years now.

  6. I don’t have any figures but the amount of young Italians working in central London ‘s bars, pubs and cafes seems to be at all time highs. If it’s any sort of indicator of the Italian economy’s strength then things are not good over there.

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