For once we have the opportunity to look at some better news for the economy of Italy so let us take it. This came yesterday from the statistics office.
In May 2019 the seasonally adjusted industrial production index increased by 0.9% compared with the previous month.
That is at least something and happened in spite of the fact that the transport production sector declined by 2.5% meaning that manufacturing fell by 0.9%. Unfortunately as we look deeper we see that even a better month has only improved a declining trend.
The percentage change of the average of the last three months with respect to the previous three months was -0.1.
The calendar adjusted industrial production index decreased by 0.7% compared with May 2018 (calendar
working days in May 2019 being the same as in May 2018).
So we see that a better May provides some hope as it also happened in the UK and France
There has been some relief for Italy from this area too as we note that the benchmark ten-year yield is now 1.7%. This has more than halved since the yield approached 3.7% in mid-October last year and as you can see there has been quite a plunge. Many countries have seen big falls in bond yields but Italy is perhaps the leader of the pack with the size of the fall. Part of this was driven by the news below which was reported by the Financial Times last week.
The European Commission on Wednesday ended weeks of negotiations with Rome by deciding not to trigger a so-called “excessive deficit procedure”, which could ultimately have led to financial sanctions.Italy’s ruling coalition promised to trim back this year’s budget shortfall by €7.6bn, or 0.42 per cent of gross domestic product, pushing the deficit down to 2.04 per cent and ensuring the country does not breach eurozone rules.
Thus those looking for yield piled into the Italian market with such enthusiasm that the two-year yield went negative for a while in response to this. When you look at the potential risks that seems rather mad to me and even the 0.08% as I type this seems much too low as we wonder how much of this will happen?
Italy instead said it would reduce its deficit by collecting an additional €6.2bn in revenues.
But the new apparent deal plus the likelihood that the ECB will add to its 365.4 billion Euro holdings of Italian government bonds ( BTPs) has created quite a bull market.
As a generic this will be very welcome for the government which can issue debt more cheaply. We saw an example of this only yesterday.
More than 80% of the demand for Italy’s 50-year debt issue on Tuesday came from foreign investors, with Germany in the forefront, the head of the Treasury’s debt management office told Reuters.
The 3-billion-euro top-up of the 2.80% March 2067 bond drew bids of more than 17 billion euros, with a final yield of 2.877%.
This is an ongoing job on a large-scale.
Total medium and long-term issuance this year will amount to some 240 billion euros, Iacovoni said ( Reuters )
I am a little unclear as to why Italy is planning this.
Italy is strongly committed to issuing its first dollar bond since 2010 before the end of this year and is also eyeing private placements in other currencies, the head of the Treasury’s debt management office told Reuters.
Maybe it is some sort of response to the plan we looked at from some sections of the government to issue government bonds in a new currency.
There was also some good news earlier this month as we saw the unemployment rate fall into single figures.
The unemployment rate dropped to 9.9% (-0.2 percentage points), the youth rate decreased to 30.5% (-0.7 percentage points).
Also 2019 so far seems to be seeing a pick-up in employment.
In the period from March to May 2019, employment rose compared with the previous quarter (+0.5%, +125
Economics lives us to its reputation as the dismal science as we note that with growth hard to find this has implications for productivity. Also as we note elsewhere employment may not mean what we night assume.
Employed persons: comprise persons aged 15 and over who, during the reference week:
worked for at least one hour for pay or profit;
Our positive spin took a bit of a pounding from the European Commission yesterday.
Amid a challenging external environment real GDP growth in 2019 as a whole is forecast to be marginal (0.1%).
In 2020, economic activity should rebound moderately to 0.7% in line with the gradual improvement of the
global trade prospects and benefiting from a positive carryover effect and a calendar effect, given that 2020 has
two working days more than 2019.
Those are small numbers and I note that any improvement next year seems to rely on a calendar effect which will wash out. As Italy grew by 0.1% in the first quarter that is it for the year if this forecast is accurate. Also the forecast was worried about prospects for the labour market and underemployment in particular.
But weak economic activity is likely to weigh on the
labour market as indicated by the rising number of workers supported by the wage guarantee fund (Cassa
Integrazione Guadagni, CIG), which compensates for the income lost due to reduced work hours, and firms’
markedly lower employment expectations.
I also note that the Bank of Italy’s surveys show that Italians fear that unemployment may rise again.
This has been quite a saga in the credit crunch era and the travails of Deutsche Bank earlier this week show that the problem extends way beyond the borders of Italy. In fact DB was not the only bank in the news on Monday as an old friend returned. From Reuters.
Italy is struggling to pull together a rescue plan for Carige (MI:CRGI) which the troubled Genoa-based bank needs to avoid a liquidation, two sources familiar with the matter said………..The latest attempt to salvage Carige revolves around a depositor protection fund (FITD) financed by Italian banks which, one of the sources said, would provide some 520 million euros ($583 million) in fresh capital out of a total of 800 million needed to save the bank.
That last number is revealing because I think last time around we were told that it was 600 million. No wonder no-one has been willing to step in. Also I note that FinanzaReport.it suggests this.
although some rumors in the last hours have raised the bar up to 900 million.
Those who recall the Atlante bailout fund will recall that it ended up weakening the other banks and had to call for more cash or Atlante II as we go down a familiar road.
The real issue is that all the dithering and denial means that things do not get sorted and thus the banks continue to be a drag on rather than an aid for growth in the Italian economy. Also the denial problem extends beyood the borders of Italy as the EU Auditors Commission pointed out yesterday.
The 2018 stress test imposed less severe adverse scenarios in countries with weaker economies
and more vulnerable financial systems. …. The
auditors also found that not all vulnerable banks were included in the test and that certain banks
with a higher level of risk were excluded.
I wonder which country was forefront in their minds?
Whilst there have been some flickers of better news we find ourselves in familiar “girlfriend in a coma” territory sadly. Italy is a lovely country but its economic problems can be symbolised by this from Corriere Della Salla
The government tries to close the game on Alitalia. The scheme is a veiled nationalization of the former flag company, focusing on the establishment of a new company where the majority of the capital will be in public hands. In practice, the process of re-launching the carrier, currently in the commissioning procedure, will have to be Ferrovie dello Stato, with a 35% stake, and the Ministry of Economy, through a 15% stake.
Still for an airline nicknames Always Late In Take-off Also Late In Arrival there was some more hopeful news in the report.
Last month Alitalia was also the most punctual carrier in Europe.
But as we look further ahead the weak birth rate will pose further problems should it continue.
Perhaps Italy should take the chance to claim it is rising to environmental and green challenges via this route