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.

 

 

 

 

 

 

 

 

Advertisements

The Greek economic depression continues to the sound of silence

Today it is time again to look at what has been in my time as a blogger a regular and indeed consistent contender for the saddest story of all. This is of course the issue proclaimed as “shock and awe” by Euro area ministers such as Christine Lagarde back in May 2010 as they sent Greece spiralling into an economic depression from which it shows little sign of returning. This was accompanied by a media operation where those who argued for a different course of action were smeared with claims that they would damage the Greek economy. How shameful that was!

Instead we got austerity and claims of an internal devaluation instead of the old IMF strategy where the austerity was ameliorated by a currency devaluation. Oh and promises of reform which remain in the main just that promises. Eventually there was a default but by then it was not enough partly because the official creditors refused to take part. Drip by drip we have had confessions of failure as the IMF first decided its sums were wrong and more recently has become a fan of fiscal stimulus rather than austerity. Just as a reminder Greece was supposed to return to growth in 2012 (1.1%) and then 2.1% for two years before growing at 2.7% until the end of time.

An economic depression

How do we measure this? Well the first signal is that Greek GDP was 19.5% lower in the second quarter of this year than it was in the second quarter of 2010 when “shock and awe” was proclaimed. So that is a severe depression or Great Depression. There is no other way of putting that.

If we move to the present position then we see this.

Available seasonally adjusted data indicate that in the 2nd quarter of 2016 the Gross Domestic Product (GDP) in volume terms increased by 0.2% compared with the 1st quarter of 2016 against the increase of 0.3% that was announced for the flash estimate.

Sadly even this brief flicker of candle light gets sucked up by the gloom when we look at the annual comparison.

In comparison with the 2nd quarter of 2015, it decreased by 0.9% against the decrease of 0.7% that was announced for the flash estimate of the 2nd quarter on August 12, 2016.

We have other signs of a depression here. Firstly the fact that so far there is no rebound. Ordinarily however bad things are economies eventually rebound in what is called a V-shaped response but here we have a much grimmer L shape as in a collapse and then no recovery. Also numbers in such a situation are mostly revised upwards but as you can see it has in fact been downwards.

Wages

An important signal of these times has been the behaviour of wages and especially real wages well we have seen nothing like this. There is an index for Greek wages for different sectors so let us start with manufacturing which at the start of 2010 was at 95.9 and at the start of 2016 was at 45.5 and had fallen by over 9% in the preceding year. It is not the worst example as the wages of the professional and scientific sector fell from 100.8 to 45.9 over the same time period.

Just so you see both sides of the coin the best number was for the information sector which only and by only I mean comparatively fell from 89.8 to 80.9.

Retail Trade

This sadly is one of the worst examples of the economic depression. You may wish to make sure you are sitting comfortably before you read that on a scale where 2010=100 then Greek retail trade was 69.8 in June. Grimmest of all is that food is at 78.1.

Is it getting any better or Grecovery as some were proclaiming in 2013? Take a look for yourself.

The overall volume index in retail trade (i.e. turnover in retail trade at constant prices) in June 2016, recorded a decrease of 3.6% compared with the corresponding index of June 2015, while compared with the corresponding index of May 2016, recorded an increase of 3.7%.

May must have been dreadful mustn’t it?

The Monetary System

We see regular proclamations of recovery but regular readers will recall the situation last year when Greece saw capital flight on a large-scale. Capital Greece sums it up like this.

Greece΄s banking sector saw a 42 billion euro deposit outflow from December to July last year.

They try to put a positive spin on the data but it tells a rather different story.

Greek bank deposits dropped slightly in July after a rise in the previous two months………Business and household deposits fell by 160 million euros, or 0.13 percent month-on-month to 122.58 billion euros ($138.3 billion), their lowest level since November 2003.

That means the credit crunch is ongoing.

Export Led Growth

One of the ways that the “internal devaluation” was supposed to benefit Greece was via foreign trade. This should impact in two ways. Firstly exports would be more price competitive and rise and secondly imports would fall in sectors where Greek producers can replace them. How is that going? From Kathimerini.

exports of Greek products dropped to their lowest point in the last four years in the first half of 2016, posting an annual decline of 8.1 percent to 11.8 billion euros, against 12.8 billion in January-June 2015. Excluding exports of oil products, the annual decline came to 1.4 percent.

So the oil price fall has had an impact except care is needed here if it was counted when we were being told this was getting better. Especially troubling considering the efforts of the ECB to reduce the value of the Euro came from this.

There was a notable decrease in exports, including oil products, to non-EU countries, where they fell by 14.6 percent compared to June last year.

An area which had shown signs of hope was tourism where I recall better numbers and hope for the future but sadly the Bank of Greece has another tale.

In January-June 2016, the balance of travel services showed a surplus of €2,991 million, down 6.7% from a surplus of €3,205 million in the same period of 2015…….The decrease in travel receipts resulted from a 1.6% decline in arrivals and a 4.9% fall in average expenditure per trip.

Just in case someone wants to deploy the scapegoat of 2016 which is of course Brexit that has so kindly given the poor much abused weather a rest. well see for yourself…

Receipts from the United Kingdom increased by 24.8% to €388 million.

Actually it is people from outside the European Union who have stopped going to Greece for a holiday it would appear.

while receipts from outside the EU28 dropped by 21.9% (June 2016: €469 million, June 2015: €601 million).

Any thoughts as to why?

Comment

As we review the scene there is a familiar austerity drumbeat.From Kathimerini.

Tens of thousands of pensioners will see their auxiliary pensions slashed by between 10 and 12 percent on Friday morning, while in some cases the cuts will even exceed 40 percent…..This second wave of cuts will affect 144,000 pensioners, after a first one hit just under 67,000 retirees in August.

Odd that because we have been told so many times that reform has been completed. Oh and we have been told so many times that the banks are fixed as well.

Greece’s four systemic banks increased their provisions for nonperforming loans by a total of 1 billion euros during the second quarter of the year

By systemic they mean toxic under the Britney definition.

I’m addicted to you
Don’t you know that you’re toxic
And I love what you do
Don’t you know that you’re toxic

Meanwhile the Greek depression continues to the Sound of Silence.

Hello darkness, my old friend
I’ve come to talk with you again
Because a vision softly creeping
Left its seeds while I was sleeping
And the vision that was planted in my brain
Still remains within the sound of silence