One of the routes that human emotions take when confronted with a problem starts with anger and then goes to denial. If there was an element of anger in the election of the so-called populist government in power in Italy then we have seen denial on a grand scale towards the end of last week..
Italy PM Conte: The country’s economic fundamentals remain strong.
That is as even the casual observer must be aware of comical Ali status but wait there is more.
#Italy’s PM Says Government Remains Positive on Growth Forecasts || denial
#Conte says that “the government is pushing ahead on the implementation of measures that have already been approved, and their effect will contribute to a progressive growth in the second part of the year” || first half is gone, sorry mate. ( @liukzilla )
Italian ministers and prime ministers operating mentally for a land far,far away to coin a phrase of course nothing new, We can recall Prime Minster Renzi recommending the shares of the bank Monte Paschi which collapsed and former finance minister Padoan who continually told us the Italian banks were in good shape as the house burned around him.
What provoked this new phase?
Something of a bombshell was released by the Italian statistics office on Tuesday as it looked at the industrial sector.
In December 2018 the seasonally adjusted turnover index decreased by 3.5% compared to the previous month (-2.7% in domestic market and -4.7% in non-domestic market); the average of the last three months compared to the previous three months decreased by 1.6% (-1.5% in domestic market and -1.8% in non-domestic market).
This is worse than it looks as turnover data includes price rises and whilst there is not much consumer inflation recorded in Italy there is some in the industrial sector.
The total producer price index increased by 4.1% compared with December 2017 (5.2% on domestic market and 1.2% on foreign market).
The situation was also grim if you looked at the likely future.
The unadjusted industrial new orders index decreased by 5.3% with respect to the same month of the
previous year (-4.6% in domestic market and -3.6% in non-domestic market).
A little care is needed as these sort of numbers are volatile but they have impacted at a time when weak numbers were feared and then arrived on an ever larger scale.
Fitch Ratings
There was some good news for Italy in that it avoided a downgrade late on Friday although it came with a familiar message.
GDP growth has stalled as domestic policy uncertainty and weaker external demand has dragged down investment, while private consumption growth has also lost momentum. Fitch forecasts GDP growth of 0.3% in 2019, down from 0.8% in 2018 (compared with the 1.2% we forecast for both years at our previous review in August), with investment growth falling to 0.4% from 3.8% last year.
There are several issues here so let us open with Fitch being wrong again and in the circumstances by quite a bit, But the theme of Italy slowing down from not very much continues and frankly it may still be over optimistic. We do not know what the latter part of 2019 will look like but as we have observed above Italy which was already in recession at the end of last year has slowed further at the opening of this. Also the investment growth in 2018 does not seem to have helped much. However you spin it we return to the “Girlfriend in a Coma” theme.
This would take the five-year average to 0.9%, compared with the ‘BBB’ median of 3.2%, and leave the level of Italy’s real GDP still 3.5% below that in 2007. We continue to assess Italy’s trend rate of growth at around 0.5%.
Fiscal Problems
Considering their changed view on the economy Fitch seems very timid on the subject of their likely impact on the fiscal situation.
Fitch forecasts an increase in the general government deficit from 1.9% of GDP in 2018 to 2.3% this year, and 2.7% next, 0.1pp higher than at our previous review.
The danger here is that the fiscal deficit starts as Paul Simon puts it “slip-sliding away.” For the moment the labour market looks okay as shown by the Monthly Economic Report.
In the labour market, employment stabilized and the unemployment rate decreased only marginally.
But if the recession leads to job shedding then falling tax revenue and higher social security spending can see fiscal numbers deteriorate quickly. I have seen this happen in the UK in the past although fortunately as last week showed the UK is presently going the other way with improvements. This moves us onto the national debt and the emphasis is mine.
Fitch forecasts an increase in general government debt to 132.3% of GDP in 2020 from 131.7% in 2018, driven by lower nominal GDP growth, and a 0.7pp weakening in the primary balance from 2018-2020. This compares with the current ‘BBB’ median of 38.5% of GDP and would leave Italy as one of the most highly indebted sovereigns we rate, exposed to downside risks and with reduced scope for counter-cyclical fiscal policy.
Whilst the increase is only marginal it depends on the rather rose-tinted view of fiscal deficit changes we looked at above. Official projections invariably show the ratio falling in a denial of reality as it keeps going up. Also pressure is being provided by the way that Italian bond yields have risen with the ten-year yield now 2.77%. Whilst that is historically low it is much higher than Italy had started to get used too.
Also there are concerns about the structure of the debt. This starts with the fact that the ECB is no longer buying each month. There is still support from its 368 billion Euros of holdings but relative to the size of the Italian debt pile it bought less than elsewhere as it buys on a ratio (capital key) that relates more to economic performance. Next comes the fact that as well as Italian banks French and German banks piled into Italian debt. It did not turn out to be the “easy money” they hoped for and as FT Alphaville pointed out last April led to some strange developments.
It may seem surprising that the French public bank Société de Financement Local, SFIL, has a very big exposure to the Italian sovereign debt.
But then maybe not so strange.
It was set up following the bankruptcy of Dexia.
Back then this was the state of play, what could go wrong?
The national central bank reports that banks resident in Italy had a total exposure of €626.8bn to the domestic general government in January 2018.
As we look forwards we see that Italy has an active maturity schedule to say the least and should it need more borrowing the heat could be on. This year will be especially busy with some 282 billion Euros of redemptions according to the Italian Treasury.
Comment
There is a fair bit to consider and let me add another bit of context via Fitch Ratings.
The competitiveness of the Italian economy held up in 2018. Both export and import volume growth slowed (to 0.3% and 0.7% respectively) in common with eurozone peers, and a somewhat higher income balance also supported a current account surplus estimated at 2.6% of GDP in 2018, 0.2pp lower than the year before.
Looked at in this light the Italian economy looks strong and to that we can add the private savings held. But there is no balance of payments crisis as we mull how all this “competitiveness” does not make the economy do better than it does. Meanwhile money seems to escape none the less.
We forecast some moderation in the size of net portfolio outflows, which totalled 5.1% of GDP in 2017 and 6.7% in 2018, and for net external debt/GDP to remain at close to 51% of GDP in 2020, high relative to the peer group median of 8% of GDP.
So there are clear dangers ahead for Italy and it is not clear to me this will help as they channel their inner Andy Haldane.
Istat updates the Social Mood on Economy Index, the new experimental index first released in October 2018. The index provides daily measures of the Italian sentiment on the economy. These measures are derived from samples of public tweets in Italian captured in real time.
More significant as a hint of ch-ch-changes come from looking at an addition to the basket for inflation measurement.
adult diapers
Maybe that is the most significant factor today if we consider the longer term.
Podcast
https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast15
Notayesmanseconomics's Blog 
Hi Shaun
In my view the Italian economy is in an appalling place.
It has been weak ever since the Euro started in 1999 and now there is a looming recession at hand. it wouldn’t be so bad if it had the levers of policy but it hasn’t. It cannot determine the exchange or interest rate because it doesn’t have its own currency and its fiscal leverage is determoned by the Growth and Stability Pact. This is pushing a bad situation in the direction of catastrophe.
Effectively the Italian government can do very little but of course that poses a problem not just for Italy but the rest of the EZ. Leaving the Euro would not only be a catastrophe for Italy it might well deal a terminal blow to both the Euro and indeed the EU itself. If the EU has any sense it will ditch its dirigisme and start being sensible, but that is something I’m not sure I’d take a bet on.
In the 1970s if a shop had to give you change of a few Lire you were offered small boiled sweets as nobody had or wanted coins for such a worthless amount.
I think the Italian economy was weak and badly managed run long before the Euro – of course the latter factor meant that moving to the Euro was never going to produce any long-term improvement.
HI Shaun
Thanks for a great blog about Azzur’s continuing downturn.
I guess Mr Draghi and whoever follows him later this year will have much
thinking to do to say the least.
Hi Midge and thank you
Bloomberg seems to be losing the plot.
“The ECB is getting some counterintuitive advice on how to respond to the euro area’s deepening economic slowdown – raise interest rates”
You see they told us they were expecting interest-rate increases in the Euro area due to the recovery and now we need them in the slow down! You would think that the banks do not like negative interest-rates which (in general) they cannot pass on…..
The precious does often get what it wants.
Interesting data considering Germany and France have a single Eurozone budget plan for 2021. This could involve those much vaunted fiscal transfers but the price will be twofold. A single EZ budget means a single country and I can only shudder to think what the German medicine will do to Italy, it will be Greece on steroids. Wrap up warm Italy.
Got a cold wind blowin’
through my heart
through my heart
the game is over
you win
I lose
Italy position in respect of the EU/ECB reminds me of a track on Pink Floyd’s hugely underrated Obscured by Clouds album, Wot’s uh the Deal? Roger Waters even throws in a comment on Italy’s parous demographics at the end of the chorus.
Heaven sent the promised land
Looks alright from where I stand
‘Cause I’m the man on the outside looking in
Waiting on the first step
Show me where the key is kept
Point me down the right line because it’s time
To let me in from the cold
Turn my lead into gold
‘Cause there’s a chill wind blowing in my soul
And I think I’m growing old
Hello Shaun,
“..These measures are derived from samples of public tweets in Italian….”
you have got to be kidding me ,
Are there any Adults on twitter ? all seem to be kids ( of all ages ) with mentality of ” muh , feelings” ……..
and this is now a measurement of the economy ?
god help us….
Forbin
Hi Forbin
Twitter can be a force for good where knowledge can be shared quickly and efficiently. But it is often a giant echo chamber when companies like Bloomberg intervene in the way I have described in my reply to Midge. Also you get waves of emotions on it which sometimes are good in response to disasters but sometimes are like a crowd of headless chickens.
Great blog and great podcast, Shaun, as usual.
Thank you very much for mentioning my advocacy of seasonal weights for seasonal goods in consumer price indices in your podcast.
Package holidays are among the most obviously seasonal of seasonal commodities. This is why the Irish CPI has seasonal weights for them, although not for anything else, while the UK RPI now has seasonal weights only for package holidays and for horse racing admissions. I wouldn’t recommend the Irish method for seasonally weighting package holidays, but the Irish CSO did at least see that seasonal weights were required. Also, if there is a strong uptick in inflation the Irish measure will not tend to register it with a lag, as the UK measure will. Unfortunately, I don’t speak any German and could not find any existing materials in English that explained the methodology change in package holiday trips with the revision of the German CPI.
As you alluded to, the release notes that: “A major reason for the 0.8% decrease in prices in January 2019 on December 2018 was seasonal factors. Especially package holiday prices (-24.6%) in January 2019 were lower than in the vacation month of December.” None of this January monthly drop in package holiday prices would have been due to the change in methodology, since that would have led to backward revisions, presumably to 2015.
For the previous revision to a 2010 base, the methodology document states: “At the current adaptation of the CPI the time series for fish, fruit, vegetables, clothing and footwear, package holidays and holiday flats were linked using the annual average of 2010 [rather than December 2009].” I imagine the same thing was done this time, and linking for seasonal groups was at 2015 rather than December 2014. This is an excellent idea, and should really be generalized to all commodity groups in the German CPI. Eventually, reforms in the treatment of seasonal goods in the UK consumer price series should involve annual links, but that won’t happen soon, and a better way of seasonally weighting holidays in the UK series should be introduced by next March.
Hi Andrew and no problem
After all it is a subject dear to your heart. As to the changes they have had quite an impact on the past which has had a knock-on effect on the present as well. There were some large package holiday price series revisions as I went through the database with the spring and summer of 2015 coming to mind.
I am pleased you think some of what they have done is good as I had the impression that they were moving away from your preferred scenario but that may be due to my lack of expertise in German. But it showed what a big deal moves like this can turn out to be and for something where the ordinary person might think is settled as package holidays have been around for decades now.
Remember those pre financial crisis huge American money market funds that received a bad reputation when their net asset valuation (marked to market) dropped below 100 per cent. They paid slightly above certificates of deposit and you could hide some high interest paying smelly stuff in there.
Well with neglible interest on your bank savings rate, and E.U guarantees, this (not dead yet) parrot could fly again.
Since there is no actual market for many of these bonds, fantasy evaluations will suffice (and like a smelly gym bag you really don’t want to look).
Personally I think a Goldman Sachs fractionally reserve cryptocurrency dollar backed by a Goldman Sachs fractional reserve bank is a MUCH more elegant idea. Monetization to infinity. But this is a work in progress. And they are looking for blockchain specialists right now, though my expertise in mint tea, dominoes and afternoon siestas with the cat doesn’t apply. Yes a slOww day on the markets – I know.
Hi canuckistinian
Yes we are due a disaster or two from the places that investors have gone to get some yield. Perhaps the UK property funds offering 8% yield “guaranteed”, But there are things sometimes on the other side of the coin.
“As we look forwards we see that Italy has an active maturity schedule”
Actually, where can we see that? My wanderings beyond the normal financial news sites hasn’t uncovered much publicly available information on things like this, and Google just returns pages and pages of links to sites selling me stuff (which is Google’s function, of course).
Hi TW
I looked it up at the Italian Treasury website which is a little confusing on some detail but lists out maturities for Italian bonds ( BOTs and BTPs).
“European Central Bank’s Benoit Coeure said a new round of cheap multi-year loans to banks was possible. ”
https://www.nytimes.com/reuters/2019/02/15/business/15reuters-eurozone-markets-ecb.html
It doesn’t mention where the money is coming from, but it might keep the wolves away from Italy for a while longer.
Hi mwhite
As a central bank they merely need to make an adjustment to their ledgers and the liquidity flows electronically.