The Italian economy looks to be heading south again

Today has opened with what is more disappointing economic news for the land of la dolce vita. From the Italian Statistics Office or Istat.

In July 2018 the seasonally adjusted industrial production index decreased by 1.8% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was -0.2.
The calendar adjusted industrial production index decreased by 1.3% compared with July 2017 (calendar working days being 22 versus 21 days in July 2017);

As you can see output was down both on the preceding month and on a year ago. This is especially disappointing as the year had started with some decent momentum as shown by the year to date numbers.

 in the period January-July 2018 the percentage change was +2.0 compared with the same period of 2017.

However if we look back we see that the push higher in output came in the last three months of 2017 and this year has seen more monthly declines on a seasonally adjusted basis ( 4) than rises (3). Looking ahead we see that things may even get worse as the Markit PMI business survey for manufacturing tells us this.

Italy’s manufacturing sector eased towards
stagnation during August. Both output and new
orders were lower, undermined by weak domestic
demand, whilst employment increased to the
weakest degree since September 2016……..Expectations were at their lowest for over five years.

This seems set to impact on the wider economic position.

At current levels, the PMI data suggest industry
may well provide a net negative contribution to
wider GDP levels in the third quarter of the year.

With Italy’s ongoing struggle concerning economic growth that is yet another problem to face. But it is something with which it has become increasingly familiar as the industrial production sector is still in a severe depression. What I mean by that is the peak for this series was 133.3 in August of 2007 and the benchmarking at 100 for eight years later (2015) shows what Taylor Swift would call “trouble,trouble,trouble” . The initial fall was sharp and peaked at an annual rate of 26% but there was a recovery however, in that lies the rub. In 2011 Italy saw a bounce back in production to 111.9 at the peak but then the Euro area crisis saw it plunge the depths again. It did respond to the “Euroboom” in 2016 and 17 but looks like it is falling again and an index of 105.2 in July tells its own story.

So all these years later it is still 21% lower than the previous peak. We worry in the UK about a production number which is 6.1% lower but as you can see we at least have some hope of regaining it unlike Italy.

The wider outlook

Italy’s economy is heavily influenced by its Euro area colleagues and they seem to be noting a slow down as well. From @stewhampton

The ECB committee that oversees the compilation of the forecasts now sees the risks to economic growth as tilted to the downside.

Perhaps they have suddenly noted their own money supply data! At which point they are some time behind us.  Also in the language of central bankers this is significant as they do not switch from “broadly balanced” to “tilted to the downside” lightly, and especially not when they are winding down a stimulus program.

So we see that the Italian economy will not be getting much of a boost from its neighbours and colleagues into the end of 2018.

Employment

Yet again this morning’s official release poses a question about the economic situation in July?

In the most recent monthly data (July 2018), net of seasonality, the number of employees showed a slight decrease compared to June 2018 (-0.1%) and the employment rate remained stable.

This modifies the previous picture which had been good.

The year-on-year trend showed a growth of 387 thousand employees (+1.7% in one year), concentrated among temporary employees against the decline of those permanent (+390 thousand and -33 thousand, respectively) and the growth of the self-employed (+30 thousand).

So more people were in work which is very welcome in a country where a high level of unemployment has persisted. We keep being told that the unemployment rate in Italy has fallen below 11% ( in this instance to 10.7%) but then later it gets revised back up again. Of course even 10.7% is high. I would imagine many of you have already spotted that the employment growth is entirely one of temporary jobs which does not augur well if things continue to slow down.

Some better news

Italy is a delightful country so let us note what some might regard as a triumph for the “internal competitivesness” policies of the Euro area.

Italy’s current account position is one of the country’s most improved economic fundamentals since the financial crisis. As the above chart shows, it improved by 6.2 percentage points to a sizable surplus of 2.8% of gross domestic product (GDP) last year—the highest level since 1997—from a deficit of 3.4% of GDP in 2010.

That is from DBRS research who in this section will have the champagne glasses clinking at the European Commission/

external cost competitiveness gains related to relatively slower domestic wage growth.

The Italian worker who has been forced to shoulder this will not be anything like as pleased as we note that some of the gain comes directly from this.

In response to the recession, nominal imports of goods declined significantly by around 5% a year between 2012 and
2013.

Also Italy has benefited from lower oil prices.

Since then, lower energy prices further contributed to the improvement in the current account, and Italy’s imported energy bill bottomed out at 1.6% of GDP in 2016, down from a peak of 3.9% of GDP in 2012.

Not quite the export-led growth of the economics textbooks is it? Still maybe there will be a boost from tourism.

Why everyone is suddenly going to Milan on vacation ( Wall Street Journal)

According to the WSJ Milan has  “been hiding in plain sight for decades ” which must be news to all of those who have been there which include yours truly.

Comment

The downbeat economic news has arrived just as things seemed to have got calmer regarding the new coalition government. Or as DBRS research puts it.

More recently, the leaders have reaffirmed their commitment to adhere to the European Union (EU) framework. In DBRS’s view, this is a positive development.

This has meant that the ten-year bond yield which had risen above 3.2% is now 2.75%. So congratulations to anyone who has been long Italian bonds over the past ten days or so and should you choose you will be able to afford to join the WSJ in Milan as a reward. However bond yields have shifted higher if we return to the bigger picture so this will continue to be a factor.

In DBRS’s view, total interest expenditure as a share of gross domestic product (GDP) may slightly narrow this year compared with the 3.8% of GDP recorded in
2017.

As new issuance has got more expensive than in 2017 I am not sure about the narrowing point.

Also there is the ongoing sage about the Italian banks which has become something of a never-ending story. Officially Unicredit has been the success story here and yet if it is such a success why were rumours like these circulating yesterday?

The other rumour was a merger with Societe Generale of France. Anyway the current share price of around 13 Euros is a long way short of the previous peak of 370 or so. This reminds us of the news stories surrounding the fall of Lehman Bros. a decade ago as it has been a dreadful decade for both Unicredit and Italy as we note the economy is still 5% smaller than the previous peak.

 

 

 

 

 

 

 

 

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10 thoughts on “The Italian economy looks to be heading south again

  1. It only needs a mild downturn to send Italian debt dynamics through the roof. At what point do you have to cave into reality and exit the EZ? With a huge expansion of debt the only way that is sustainable is with negative interest rates and they are not in themselves sustainable and not within the control of Italy.

    The Italian economy has been on a journey to nowhere since 2000 and will go nowhere in the Euro. What beckons is not only an exit from the Euro but redenomination of Euro debts into Lira. With an almost certain devaluation of a synthetic Lira this is the only way the debt burden will be manageable.

    If Italy quits the EZ what price the EU?

    • The EU will do everything it can to keep Italy in the EZ, so if Italy quits it will be because it has no choice, and that will signal the failure of the EU.

      • this is true but think about what the Germans will think when Italy leaves by choice then what about the money the Italian banks owe the German ones……ouch!

        more “interesting” is when Germany elects a leader who is not so in love with the soviet EU and wants its money back or does not want to kept being touched for everyone else’s debts ( just like housing there is only so far you can go in lending money to countries to keep buying your goods – it becomes the proverbial “taking every ones else’s washing in ” )

        and yes the EU is “hotel California ” , we’re checking out but don’t think we’re leaving by a long shot….

        Forbin

  2. Shaun, like you I am “long” on the country as a destination for the good life and holidays despite its obvious economic issues. The food, the weather, the architecture and the style.
    I visited northern Italy a couple of weeks ago for a 600km surfari. It was sad to land in Genoa and see the fallen bridge. Locals say that thousands of residents have to be relocated from homes built after the bridge when the entire srtucture has to be demolished, also the road network tbereabouts is suffering congestion carnage.

    Highlights of my holiday were the 14euro a day hire car, the 120 euro surfboard from Decathlon, drinking beer from somerset in the Levanto beach resort, gelato in Lerici and eating out in Volterra and a 100quid night in a 5 star art deco hotel in Genoa.

    Lets hope Italy prospers. Paul

    • Hi Paul

      Agreed, I hope that Italy prospers too. But we both know that reality has been and looks set to be different to that.The car hire rate seems extraordinary to someone who has been looking at Zipcar in London and notes that the £54 a day for a Fiesta only drops to £35 a day if you take it for 5 days and rises again to £49 a day if you take it for seven days. I have been looking because I drive my car so rarely these days.

  3. Italian 10yr yield seems to be being capped at 3.25% no doubt by ECB buying, we’ll see how long they keep it up. If a Lira/Euro system is reached, the euro should soar, making the repayment in the faster depreciating Lira a nightmare similar to the emerging countries that have their debt denominated in dollars at the moment.

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