What are the economic prospects for the Euro area?

As we progress into 2020 there has been a flurry of information on the Euro area economy. However there has been quite a bit of dissatisfaction with the usual indicators so statistics offices have been looking  at alternatives and here is the German effort.

The Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis) report that the mileage covered by trucks with four or more axles, which are subject to toll charges, on German motorways decreased a seasonally adjusted 0.6% in December 2019 compared with the previous month.

As a conceptual plan this can be added to the way that their colleagues in Italy are now analysing output on Twitter and therefore may now think world war three has begun. Returning to the numbers the German truck data reminds us that the Euro areas largest economy is struggling. That was reinforced this morning by some more conventional economic data.

Germany exported goods to the value of 112.9 billion euros and imported goods to the value of 94.6 billion euros in November 2019. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports decreased by 2.9% and imports by 1.6% in November 2019 on the same month a year earlier. Compared with October 2019, exports were down 2.3% and imports 0.5% after calendar and seasonal adjustment.

We get a reminder that what was one if the causes of economic imbalance before the credit crunch has if anything grown as we note the size of Germany’s trade surplus.  It is something that each month provides support for the level of the Euro. Switching to economic trends we see that compared to a year before the larger export volume has fallen by more than import volume. This was even higher on a monthly basis as we note that the gap between the two widened. But both numbers indicate a contractionary influence on the German economy and hence GDP ( Gross Domestic Product).

Production

Today’s data opened with a flicker of positive news.

In November 2019, production in industry was up by 1.1% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In October 2019, the corrected figure shows a decrease of 1.0% (primary -1.7%) from September 2019.

However this still meant this.

-2.6% on the same month a year earlier (price and calendar adjusted)

There is a particular significance in the upwards revision to October as some felt that the original numbers virtually guaranteed a contraction in GDP in the last quarter of 2019. In terms of a breakdown the better November figures relied on investment.

In November 2019, production in industry excluding energy and construction was up by 1.0%. Within industry, the production of capital goods increased by 2.4% and the production of consumer goods by 0.5%. The production of intermediate goods showed a decrease by 0.5%.

Only time will tell if the investment was wise. The orders data released yesterday was not especially hopeful.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2019 a seasonally and calendar adjusted 1.3% on the previous month.

Producing more into weaker orders has an obvious flaw and on an annual basis the situation was even worse.

-6.5% on the same month a year earlier (price and calendar adjusted)

Perhaps the investment was for the domestic economy as we look into the detail.

Domestic orders increased by 1.6% and foreign orders fell 3.1% in November 2019 on the previous month. New orders from the euro area were down 3.3%, new orders from other countries decreased 2.8% compared to October 2019.

But if we widen our outlook from Germany to the wider Euro area we see that it was the source of the strongest monthly slowing.

In a broad sweep orders for production rose from 2013 to December 2017 with the series peaking at 117.1 ( 2015=100) but we have been falling since and have now gone back to 2015 at 100.3.

The Labour Market

By contrast there is more to cheer from this area.

The euro area (EA19) seasonally-adjusted unemployment rate was 7.5% in November 2019, stable compared with
October 2019 and down from 7.9% in November 2018. This remains the lowest rate recorded in the euro area
since July 2008.

In terms of the broad trend the Euro area is now pretty much back to where it was before the credit crunch and is a long way from the peak of above 12% seen around 2013. But there are catches and nuances to this of which a major one is this.

In November 2019, the unemployment rate in the United States was 3.5%, down from 3.6% in October 2019 and
from 3.7% in November 2018.

That is quite a gap and whilst there may be issues around how the numbers are calculated that still leaves quite a gap. Also unemployment is a lagging indicator but it may be showing signs of turning.

Compared with October 2019, the number of persons unemployed increased by
34 000 in the EU28 and decreased by 10 000 in the euro area. Compared with November 2018, unemployment fell
by 768 000 in the EU28 and by 624 000 in the euro area.

The rate of decline has plainly slowed and if we look at Germany again we wait to see what the next move is.

Adjusted for seasonal and irregular effects, the number of unemployed remained unchanged from the previous month, standing at 1.36 million people as well. The adjusted unemployment rate was 3.1% in November, without any changes since May 2019.

Looking Ahead

There was some hope for 2020 reflected in the Markit PMI business surveys.

Business optimism about the year ahead has also improved
to its best since last May, suggesting the mood
among business has steadily improved in recent
months.

However the actual data was suggested a low base to start from.

Another month of subdued business activity in
December rounded off the eurozone’s worst quarter
since 2013. The PMI data suggest the euro area
will struggle to have grown by more than 0.1% in
the closing three months of 2019.

There is a nuance in that France continues to do better than Germany meaning that in their turf war France is in a relative ascendancy. In its monthly review the Italian statistics office has found some cheer for the year ahead.

The sectoral divide between falling industrial production and resilient turnover in services persists. However, business survey indicators convey first signals of optimism in manufacturing. Economic growth is projected to slightly increase its pace to moderate growth rates of 0.3% over the forecast horizon.

Comment

The problem for the ECB is that its monetary taps are pretty much fully open and money supply growth is fairly strong but as Markit puts it.

At face value, the weak performance is
disappointing given additional stimulus from the
ECB, with the drag from the ongoing plight of the
manufacturing sector a major concern.

It is having an impact but is not enough so far.

However, policymakers will be encouraged by the resilient
performance of the more domestically-focused
service sector, where growth accelerated in
December to its highest since August.

This brings us back to the opening theme of this year which has been central bankers both past and present singing along with the band Sweet.

Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way
To blockbuster

Hence their move towards fiscal policy which is quite a cheek in the circumstances.

The conceptual issue is that all the intervention and central planning has left the Euro area struggling for any sustained economic growth and certainly slower growth than before. This is symbolised by Italy which remains a girlfriend in a coma.

The Composite Output Index* posted at 49.3 in December,
down from 49.6 in November, to signal a second consecutive fall in Italian private sector output. Moreover, the decline quickened to a marginal pace.

 

Italy faces yet more economic hard times

This morning has brought more signs of the economic malaise that is affecting Italy, a subject which just goes on and on and on. Here is the statistics office.

In 2019, GDP is expected to increase by 0.2 percent in real terms. The domestic demand will provide a contribution of 0.8 percentage points while foreign demand will account for a positive 0.2 percentage point and inventories will provide a negative contribution (-0.8 percentage points).

That is a reduction of 0.1% on the previous forecast. In one way I doubt their forecasts are accurate to 0.1% but then in another way counting 0.1% growth is their job in Italy. The breakdown is odd though. As the net foreign demand may be small but any growth is welcome at a time of a time war but with domestic demand growing why are inventories being chopped?

So annual economic growth has gone 1.7% in 2017 and 0.8% last year and will now be 0.2% if they are correct. They do manage a little optimism for next year.

In 2020, GDP is estimated to increase by 0.6 percent in real terms driven by the contribution of domestic demand (+0.7
percentage points) associated to a positive contribution of the foreign demand (+0.1 p.p.) and a negative contribution of inventories (-0.2 p.p.).

So the main change here is that the decline in inventories slows. If we switch to a positive we are reminded that Italy’s trade position looks pretty good for these times.

In 2019, exports will increase by 1.7 percent and imports will grow by 1.3 percent, both are expected
to slighty accelerate in 2020 (+1.8% and +1.7% respectively)

Looking at domestic demand it will be supported by wages growth and by this.

Labour market conditions will improve over the forecasting period but at moderate pace. Employment
growth is expected to stabilise at 0,7 percent in 2019 and in 2020. At the same time, the rate of
unemployment will decrease at 10.0 percent in the current year and at 9.9 percent in 2020.

They mean 10% this year and 9.9% next although there is a catch with that.

The number of unemployed persons declined (-1.7%, -44 thousand in the last month); the decrease was the result of a remarkable drop among men and a light increase for women, and involved all age groups, with the exception of over 50 aged people. The unemployment rate dropped to 9.7% (-0.2 percentage points), the youth rate decreased to 27.8% (-0.7 percentage points).

As you can see the unemployment rate was already below what it is supposed to be next year so I struggle to see how that is going to boost domestic demand. Perhaps they are hoping that employment will continue to rise.

In October 2019 the estimate of employed people increased (+0.2%, +46 thousand); the employment rate rose at 59.2% (+0.1 percentage points).

The Markit PMIs

There was very little cheer to be found in the latest private-sector business survey published earlier.

The Composite Output Index* posted at 49.6 in November,
down from 50.8 in October and signalling the first decline in Italian private sector output since May. Despite this, the rate of contraction was marginal.
Underpinning the latest downturn was a marked slowdown
in service sector activity growth during November, whilst
manufacturing output recorded its sixteenth consecutive
month of contraction. The latest decrease was sharp but
eased slightly from October.

I doubt anyone is surprised by the state of play in Italian manufacturing so the issue here is the apparent downturn in the service sector. This leads to fears about December and for the current quarter as a whole. Also the official trade optimism is not found here.

Meanwhile, export sales continue to fall.

Sadly there is little solace to be found if we look at the wider Euro area.

The final eurozone PMI for November came in
slightly ahead of the earlier flash estimate but still
indicates a near-stagnant economy. The survey
data are indicating GDP growth of just 0.1% in the
fourth quarter, with manufacturing continuing to act
as a major drag. Worryingly, the service sector is
also on course for its weakest quarterly expansion
for five years, hinting strongly that the slowdown
continues to spread.

Unicredit

We have looked regularly at the Italian banking sector and its tale of woe. But this is from what is often considered its strongest bank.

After cutting a fifth of its staff and shutting a quarter of its branches in mature markets in recent years, UniCredit said it would make a further 8,000 job cuts and close 500 branches under a new plan to 2023………UniCredit’s announcement triggered anger among unions in Italy, where 5,500 layoffs and up to 450 branch closures are expected given the relative size of the network compared with franchises in Germany, Austria and central and eastern Europe.

Back in January 2012 I described Unicredit as a zombie bank on the business programme on Sky News. It has spent much if not all of the intervening period proving me right. That is in spite of the fact that ECB QE has given it large profits on its holdings of Italian government bonds. Yet someone will apparently gain.

UniCredit promised 8 billion euros ($9 billion) in dividends and share buybacks on Tuesday in a bid to revive its sickly share price, although profit at Italy’s top bank will barely grow despite plans to shed 9% of its staff.

This is quite a mess as there are all sorts of issues with the share buyback era in my opinion.  In the unlikely event of me coming to power I might rule them ultra vires as I think the ordinary shareholder is being manipulated. Beneath this is a deeper point about lack of reform in the Italian banking sector and hence its inability to support the economy. This is of course a chicken and egg situation where a weak economy faces off with a weak banking sector.

Mind you this morning Moodys have taken the opposite view.

The outlook for Italy’s banking system has changed to stable from negative as problem loans will continue to fall, while banks’ funding conditions improve and their capital holds steady, Moody’s Investors Service said in a report published today.

“We expect Italian banks’ problem loans to fall in 2020 for a fifth consecutive year,” said Fabio Iannò, VP-Senior Credit Officer at Moody’s. “However, their problem loan ratio of around 8% remains more than double the European Union average of 3%, according to European Banking Authority data. We also take into account our forecast for weak yet positive Italian GDP growth, and our stable outlook on Italy’s sovereign rating.”

What could go wrong?

Comment

There is a familiar drumbeat and indeed bass line to all of this. In the midst of it I find it really rather amazing that Moodys can take UK banks from stable to negative whilst doing the reverse for Italian ones! As we look for perspective we see that the “Euro boom” and monetary easing by the ECB saw annual economic growth of a mere 1.7% in 2017 which has faded to more or less zero now. We are back once again to the “girlfriend in a coma” theme.

Italy has strengths in that it has a solid trade position and is a net saver yet somehow this never seems to reach the GDP data. Maybe the grey economy provides an answer but year after year it fails to be measured. Of course if politico are correct there is always plenty of trade and turnover here.

Italy’s new coalition government might not last the winter, with tensions reaching a peak this week over EU bailout reform……The 5Stars oppose the planned ESM reform because they say it would make it harder for highly indebted countries, like Italy, to access bailout funds without painful public-debt restructuring.

That reminds me about fiscal policy which is the new go to in the Euro area according to ECB President Christine Lagarde, well except for Italy and Greece.

 

 

 

How will Italy cope if its economy shrinks again?

Over the past few says the Standard and Poors ratings agency has been running its slide rule over Italy and yesterday in his final press conference Mario Draghi of the ECB indulged in some trolling.

No, of course not. Things have changed completely and frankly, everybody now in Italy said and stated that the euro is irreversible. So while there may have been hypothetical doubts in one part of the governance of the country, there aren’t any more, so it’s been accepted.

I am not sure if that was a promise or a type of threat! The problem with this sort of rhetoric though had already been highlighted by Mario himself.

 Incoming economic data and survey information continue to point to moderate but positive growth in the second half of this year.

It was in the bit where he felt the need to point out that growth would be positive and was perhaps a response to this from Markit earlier that day.

The eurozone economy started the fourth quarter
mired close to stagnation, with the flash PMI
pointing to a quarterly GDP growth rate of just
under 0.1%………Optimism about future prospects deteriorated further in October to the lowest for over six years,

They had even dragged Mario into it.

The survey indicates that Mario Draghi’s tenure at
the helm of the ECB ends on a note of near-stalled
GDP, slower jobs growth, near-stagnant prices and
growing pessimism about the outlook.

As you can see they gave a different picture which was of marginal/no growth that looked set to deteriorate. Actually Mario was worried about that too if we look further down his speech.

The risks surrounding the euro area growth outlook remain on the downside. In particular, these risks pertain to the prolonged presence of uncertainties, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets.

Also whilst Markit did not give specific detail for Italy this was troubling.

The rest of the euro area saw a near-stalling of
growth, with output rising at the weakest pace since
the current upturn began in August 2013

What about Italy?

This reminds me of something from the French statistics office that I quoted on Wednesday.

Italian economic growth has remained almost non-existent for more than a year (0.0% in Q2 after +0.1% in Q1).

If you are already not growing and things are getting worse that has a clear implication and it takes us back to our “Girfriend in a coma” theme for Italy. This is where it does not fully participate in economic upswings but sadly does in downswings.

If we look at the area that causes the most concern around the world right now the Italian statistics office told us this earlier this month.

In August 2019 the seasonally adjusted industrial production index increased by 0.3% compared with the
previous month. The change of the average of the last three months with respect to the previous three
months was -0.3%.  The calendar adjusted industrial production index decreased by 1.8% compared with August 2018 (calendar working days being 21 versus 22 days in August 2018).

The manufacturing sector declined by 2.8% on a year ago and the manufacture of transport equipment fell by 6.9%.

So the pattern here was of recovery in 2015 followed by growth in 2016 and 17 but the growth slowed at the beginning of 2018 and has turned into declines. The underlying index is at 104.9 where 2015=100 so we see that the growth spurt is slip-sliding away.

The problem is that there is another catch.

The unadjusted industrial new orders index decreased by 10.0% with respect to the same month of the previous year (-4.0% in domestic market and -16.3% in non-domestic market).

This meant that the seasonal adjustment needed to do some quite heavy lifting to get us to this.

The seasonally adjusted industrial new orders index increased by 1.1% compared to July (+1.1% in domestic market and +1.0% in non-domestic market); the average of the last three months decreased by 1.6% compared to the previous three ones.

The Banks

If Italy is to change its economic path then it needs a reformed banking sector but as this from Reuters highlights we are back to the same old problems.

 Italy wants to shield Monte dei Paschi (BMPS.MI) from bad loan losses as it prepares the bailed-out bank for a sale, but faces resistance from European Union competition authorities, two sources close to the matter said.

Yep we are back to the world’s oldest bank which to link to the start of this story has operated much of this century under what are called the Draghi Laws. As ever the can is being kicked via a Special Purpose Vehicle or SPV.

Sources have told Reuters the Treasury wants to lower the impaired debt ratio to 5% by spinning off some 10 billion euros in problem loans that would be merged with the assets of Treasury-owned bad loan manager AMCO.

We find ourselves taking a trip into a type of fantasy land yet again.

Monte dei Paschi values debts unlikely to be repaid in full at just over half their nominal value and its worst performing loans at 38%.

That compares with an estimated average price of 27% of nominal value for soured loan transactions in Italy this year, a Banca IFIS report states.

How much? Well here is another way of putting it.

One of the sources said a sale would imply a 1.5 billion euro loss for Monte dei Paschi, hurting the bank’s minority shareholders but not the Treasury, which would benefit from the lower transfer price since its controls 100% of AMCO.

This is a situation that we have observed time and time again in the Italian banking crisis. This is where fantasy numbers are used to fudge the situation but sooner or later they end up facing reality. In this case it is minority shareholders in Monte Paschi who would take the punishment and remember they may well recall being told by Prime Minister Renzi that the bank was a good investment.

Fiscal Position

On Monday we got a reminder that it is not the fiscal deficits that are a problem for Italy.

The government deficit to GDP ratio decreased from 2.4% in 2017 to 2.2% in 2018. The primary surplus as a percentage of GDP was 1.5% in 2018, up by 0.2 percentage points with respect to 2017.

The government debt to GDP ratio was 134.8% at the end of 2018, up by 0.7 percentage points with respect to the end of 2017.

We have had a lot of political rhetoric about it borrowing more but overall Italy has not. The picture has been confused by Eurostat’s inability to produce seasonally adjusted numbers for Italy but the unadjusted ones are if anything lower than in 2018.

In the short-term it remains very cheap for Italy to borrow with its ten-year yield being a mere 1.01%. That is amazingly cheap in the circumstances and can only represent the expectation of being able to sell to the ECB at a higher price as there is a genuine danger of a downwards spiral in an economic slow down.

Comment

We find that the ongoing Italian economic weaknesses such as low growth in the good times and a banking sector full of zombies ready for Halloween leave it exposed to any economic downturns. It is a lovely country and on some viewings has economic strengths as the Bank of Italy reports.

Exports continued to increase in the second quarter, despite the contraction in international trade. The current account surplus rose further, to 2.8 per cent of GDP; foreign sales may have faltered in the following months.

But this leads to another fail for economics 101 as this should lead to economic dynamism except in Italy it never does.

Economic activity in Italy increased only slightly in the second quarter and, in the light of the available data, it could have remained almost stationary in the third……..There is still the risk that the unfavourable developments in industry will be transmitted to the other sectors of the economy.

Any further weakness in economic growth will put even more pressure on this.

The Government estimates net borrowing at 2.2 per cent of GDP this year, the same as in 2018. The debt-to-GDP ratio is expected to rise from 134.8 to 135.7 per cent of GDP.

So whilst I wish Mario Draghi a happy retirement it is also true that his tenure at the ECB has done little for his home country and via the way policy has been tilted towards an increasingly zombified banking sector may in fact have made things worse.

the next fact can be swung several ways.

Since 2015, the resident population has been decreasing, setting up a phase of demographic decline
for the first time in the last 90 years. At 31 December 2018 the population amounted to 60,359,546
residents, over 124 thousand less than the previous year (-0.2%) and over 400 thousand less than four
years earlier.

On the positive  side it helps GDP per person and fewer people must help the green agenda. On the negative side an ageing and shrinking population is less able to deal with the sizeable national debt.

 

 

 

 

 

 

 

Some better news for the economy of Italy as it faces up to Carige and Alitalia

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

Bond Yields

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.

Labour Market

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
thousand).

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;

The Outlook

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.

The Banks

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?

Comment

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

 

Will it be a parallel currency or a parallel world for Italy?

A feature of the credit crunch has been the way that certain ideas keep popping back up and never seem to quite disappear. So let us step back in time to September 2017.

Three of Italy’s four largest parties – the anti-establishment 5-Star Movement, the right-wing Northern League and Silvio Berlusconi’s Forza Italia – propose introducing a parallel currency after an election due early next year. ( Reuters)

I think Silvio was more trying to take the wind out of the sails of his opponents as if he really believed the suggestion below he could have tried it when he was in power.

Investors sold off Italian government bonds last month after Berlusconi said he was in favor of printing a “new lira” for domestic use, to pump money into the economy. Under his plan euros would still be used for all international transactions and by tourists.

Bur back then Reuters reported on something that has had if not a rave from the grave made something of a reappearance over the past fortnight.

The Northern League’s Borghi said Italy “has to be ready for the euro’s collapse,” which he sees as only a matter of time.

He is the architect of the party’s proposal – which Berlusconi has also hinted he would support – called “mini-BOTs”, named after Italy’s short-term Treasury bills.

Borghi says initially some 70 billion euros of these small denomination, interest-free bonds would be issued by the Treasury to firms and individuals owed money by the state as payment for services or as tax rebates.

That was his proposal back then and if we stay with Reuters we can jump forwards in time to last Saturday.

The so-called “mini-BOT” scheme, named after Italy’s Treasury bills, was drawn up by the far-right, eurosceptic League party and was unexpectedly endorsed by parliament last month in a non-binding vote.

Money,Money Money

As it happens Abba summed up the plan rather well back in the day.

Money, money, money
Always sunny
In a rich man’s world
All the things I could do
If I had a little money
It’s a rich man’s world

You see another name for a “small denomination, interest-free bond” is a bank note. One more bit is required in that the Treasury Bill would need to be perpetual or much longer than the usual term ( often 90 days but sometimes of a year or so). Then you are mostly there and the government can then effectively take advantage of what is called “seigniorage”. This is where the ability to print money leaves you with a rather large profit as your 1000 Lira bill costs if we use US Federal Reserve data say 1% to print so 99% is profit. What’s not to like about that?

So at this point of the 70 billion Euros equivalent printed we have 69 billion or so left to spend, or rather the Italian government has.

What could go wrong?

This starts at the central bank as seigniorage is usually their preserve. Looked at like that they are one of the most profitable institutions in the world. Of course politicians spotted that long ago and thus the cash flows to the national treasuries with a deduction for expenses as for example the cake trolley does not fill itself.

Thus it was no surprise to see ECB President Mario Draghi saying this at the last press conference.

Now about the mini-BOT, I think I’ve answered this question in the past when the possibility was raised; they are either money and then they are illegal, or they are debt and then that stock goes up. I’ll stop here.

So he is pointing out that there is supposed to be only one form of money in the Euro area, which is the Euro itself. What he did not say but was clearly referring to it as being legal tender as in you can always settle a debt using a Euro. Also he points out that if they are debt then they will be added to the calculation of the national debt, which is what the proposal is trying to dodge.

Oh and he did not stop there he could not resist something of a dig.

Certainly the reading that people have and markets have of this mini-BOT doesn’t seem to be very positive, but I’m only just stopping at what I said; it’s either money or debt. I don’t think there is a third possibility.

Later he did explain his position in an answer to a different question.

Well, it’s very difficult to foresee hypothetical events where you assume that the President of the ECB doesn’t behave in a way to preserve the euro.

So he and his successor ( as his term ends in October) will always look to protect the Euro and will therefore always be against any such scheme. After all it is in his job description.

The debt issue

The problem is that Italy has such a large public debt, which is also large relative to its economy. The 2.32 trillion Euros is 132.2% of annual economic output or GDP. Those who have followed my “Girlfriend in a Coma” articles will know that rather than being an over spender Italy has arrived at this situation mostly because its has failed to grow its economy. In the good times it rarely grows at more than 1% per annum but sadly in the bad times it falls as much as its peers, so ground is lost. That is highlighted by the current position where over the last year GDP has fallen by 0.1%.

Thus even what is not a relatively high deficit for the public finances leads to trouble. The 43.1 billion Euros borrowed in 2015 fell to 37.5 billion in 2018 but we find that it breaks the Euro area rules. Back to Mario Draghi.

The Commission has concluded that Italy must reduce its debt-to-GDP ratio and this opinion will go to the Council. By then the Italian Government will produce – and that’s what’s been asked – a medium-term plan for reducing debt-to-GDP ratios.

Bond Yields

There are two ironies here. Let me give you one which is there was an even better situation in late 2017 and early 2018 as Italy was being paid to issue some short-term debt. Some of that will be maturing soon and investors have escaped although in terms of risk/reward they have had a shocker. The latter irony is that the current “enemy” Mario Draghi headed an organisation which bought some 366 billion Euros of Italian government bonds known as BTPs. So he made debt issuance very cheap.

In spite of the current impasse and debate Italy can still borrow cheaply in historical terms with its benchmark ten-year yield being 2.37%. The problem is that in its current malaise that starts to look rather expensive.

Comment

This is one of those situations where the phrase stuck between a rock and a hard place applies virtually perfectly. Also there is an element of denial on both sides. This is because the real issue is the inability of Italy to grow its economy and whether that can be changed? If not then all the stimuli you can think of will not change things much. Indeed Italy could be worse off as whatever the presentation of it this new plan will leave it with more debt than before. Or a higher effective money supply which when we have seen it elsewhere in places like Ukraine has ended up in trouble.

On the other side of the coin the Euro establishment needs to face up to the fact that the promises of convergence which in this instance would mean towards the economy of Germany were false. In fact there has been divergence. We will never know how Italy would have performed if it had not joined the Euro but we do know that it has not been an answer to its lack of economic growth. The latest proposals via what are called “sauces” and some words from Olli Rehn are for more bond purchases and further interest-rate cuts. But if they worked we wouldn’t be here would we?

So we are definitely seeing parallel worlds, one of which may yet have a parallel currency

 

 

 

Italy exits recession but sadly continues its economic depression

Today brings Italy into focus as we find out how it did in the first three months of this year. The mood music has been okay ( 0.3% GDP growth in France) and really rather good ( 0.7% GDP growth in Spain) but we are of course looking at the country described in economic terms as a girlfriend in a coma. The situation has recently deteriorated yet again as highlighted below.

As you can see there has been quite a plunge which illustrates part of the girlfriend in a coma issue. This is that in any economic slow down Italy participates but in a period of growth it grows much less than its peers. So it has for the whole of this century been “slip-sliding away” as Paul Simon would say. Putting that into numbers in the better periods it struggles to grow at more than 1% per annum on average. An example of that has been provided by the last six years as if we look at the period from the beginning of 2013 to the end of 2018 we see that GDP growth was less than 5%. This means that the 402.8 billion Euros of quarterly economic output at the end of 2018 was still a long way short of a number that according to the chart nudged over 425 billion early in 2008. Putting it another way it has joined in with the drops including the Euro area crisis of 2010-12 but not shown anything like the same enthusiasm for the rallies.

Fiscal Problems

This was something of a headliner last autumn as the Italian government pressed the Euro area authorities for some more laxity on the annual deficit before mostly being forced back. But this is not really the problem as Italy has not been an over spender and let me highlight with the data.

The government deficit to GDP ratio decreased from 2.5% in 2016 to 2.4% in 2017. In 2018, the Government deficit to Gross Domestic Product ratio was 2.1%

The primary surplus as a percentage of GDP was 1.4% in 2017, unchanged with respect to 2016.

In 2015 the deficit was 2.6% so we can see that Italy had behaved according to Euro area rules by being below 3% on an annual basis and furthermore had been trimming it.

The catch is that with the low level of economic growth even that has led to this as Eurostat lists those who fail the Maastricht criteria.

Greece (181.1%), Italy (132.2%), Portugal (121.5%), Cyprus (102.5%), Belgium (102.0%), France (98.4%) and Spain (97.1%)

The total has risen from 2.173 trillion Euros at the end of 2015 to 2.32 trillion Euros at the end of last year. As it happens that is nearly exactly the same size as France and the catch is that the French national debt has been rising faster which creates its own worries. But the Italian problem is the way that its debt relates to the lack of economic growth which means that relatively it poses a bigger question.

The dog that has not barked has been the issue of debt costs which would have made all of this much worse if we lived in a bond vigilantes world. But instead the advent of Euro area QE from the ECB means that debt costs have fallen for Italy. In 2015 they cost 68.1 billion Euros or 4.1% of GDP as opposed to 65 billion Euros or 3.7% of GDP last year. Extraordinary really! How? Here you go.

Italian version. Excluding QE, Italy‘s public debt ratio is 110% of GDP. ( @fwred )

Also via cheaper borrowing costs which have risen over the past year  but were believe it or not negative at the short-end for a while. Back in the Euro area crisis I recall the benchmark ten-year yield reaching 7% which puts the current 2.63% into perspective.

I note that this issue reappears from time to time. From Lorenzo Codogno earlier.

My op-ed written with ⁦⁩ on “Italydebt restructuring would do enormous damage” published today in Italy’s business daily Il Sole 24 Ore.

In some ways Euro area membership might help. What I mean by that is if the Bank of Italy wrote off its holdings of Italian bonds then the Euro as a currency might not be affected all that much as it reflects the overall area and especially a fiscally conservative Germany.

On the other side of the coin there is something which is a hardy perennial.

Euro area banks sold domestic government bonds in March (-€13bn net). The total over the past 12-month is still positive (+€23bn) but that’s all due to Italy where banks have started to increase their sovereign exposure again over the past year or so. ( @fwred )

Perhaps they are hoping there will be another ECB inspired party along the lines of this described in Il Sole 24 Ore. The emphasis is mine.

Although these loans are tied to loans to the real economy, it is expected that there will be some flexibility in its implementation in such a way as to allow banks to use the funds to buy government bonds, earning money on the rate differential (“carry trade” in jargon) ). Only when the ECB publishes the details of the transaction in June will we know how generous the new Tltro will be.

Perhaps it will be a leaving gift from Mario Draghi to the banks he used to supervise meaning Grazie Mario may be a new theme. It makes me wonder if profits from what has been called “gentlemen of the spread” maybe the only profits Italian banks these days? Also let me apologise to female traders on behalf of the author of that phrase.

Labour Market

This has brought some welcome news today.

In March 2019, the number of employed people increased compared with February (+0.3%, +60 thousand); the employment rate rose to 58.9% (+0.2 percentage points)…..The number of unemployed persons fell by 3.5% (-96 thousand); the decline involved men and women and all age classes. The unemployment rate dropped to 10.2% (-0.4 percentage points), the youth rate decreased to 30.2% (-1.6 percentage points).

As a headline the rising employment rate and falling unemployment and especially youth unemployment rates are welcome. But sadly we only have to look back to February and recall the unemployment rate was published at 10.7% to see a sadly familiar issue. It is unreliable as January was revised down by 0.5% as was March last year but February last year was revised up by 0.9%.

There is also this highlighted a year ago by a paper for the Swiss National Bank.

An exception is Italy where productivity growth started to stagnate 25 years ago

Okay why?

We find that resource misallocation has played a sizeable role in slowing down Italian productivity growth. If misallocation had remained at its 1995 level, in 2013 Italy’s aggregate productivity would have been 18% higher than its actual level. Misallocation has mainly risen within
sectors than between them, increasing more in sectors where the world technological frontier has
expanded faster.

Comment

There was both good and nor so good news in the mid-morning release.

In the first quarter of 2019 it is estimated that the gross domestic product (GDP), expressed in chained values ​​with reference year 2010, adjusted for calendar effects and seasonally adjusted, increased by 0.2% compared to the previous quarter and by 0, 1% in tendential terms.

The good news is that Italy has recovered the ground lost in the second half of last year but the kicker is that it has grown by only 0.1% in a year, which is well within the margin of error. Or if you prefer it has escaped recession but remains stuck in a depression.

Another perspective is provided by the fact that this is the first time quarterly economic growth has risen since the end of 2016. As to the productivity problem I think that it is linked to the weakness of the banking sector which needs to look beyond punting Italian bonds as a modus operandi if Italy is to improve and escape its ongoing depression.

Italy looks set for another economic recession sadly

A feature of the last year or so has been something of an economic car crash unfolding in Italy and we have received two further perspectives on that subject this morning. Sadly neither is an April Fool although in these times they have become ever harder to spot. According to Markit times not only remain hard but have deteriorated in the manufacturing sector.

Manufacturing business conditions in Italy continued
to worsen in March as a sharp reduction in new orders
led to a further decline in output. Production fell for the
eighth consecutive month, whilst new orders contracted
at the fastest rate in nearly six years. Meanwhile, business
confidence dipped slightly from February, but was
nonetheless positive.

The reported fall in new orders was led from abroad.

Additionally, new business from abroad fell in March
at a rate just shy of December 2018’s near six-and-a-half year record.

This meant that the reading was as follows.

At 47.4, the reading was down from 47.7 in February
and signalled the sharpest monthly decline in the health of
the sector since May 2013.

Also the optimism reported frankly seems at odds with reality.

Optimism regarding the year ahead outlook for output was
sustained in March, but concerns over further contractions
in customer demand and a continuation of negative market
trends meant sentiment weakened from February.

Markit itself does not seem to hold out much hope for a quick rebound.

All in all, Italian manufacturing output looks set to decline
further in Q2, especially when looking at slowdowns in key
sources of external demand in neighbouring European
markets.

Employment

The situation here posed a question too this morning.

In February 2019, the number of employed people moderately declined compared with January (-0.1%,
-14 thousand); the employment rate decreased to 58.6% (-0.1 percentage points). The fall of employment
involved mainly people aged 35-49 years (-74 thousand), while people aged over 50 continued to go up
(+51 thousand).

There is an interesting age shift in the pattern which we are seeing across a wide range of countries. There are two main drivers here which are interrelated. The first is the demographic of an ageing population. The second is the rises in official retirement ages and in Italy perhaps the ongoing economic troubles leading to actual retirements being postponed.

If the manufacturing PMI is any guide the employment falls continued in March too.

As a result of the setbacks in output and new work,
employment in Italy’s manufacturing sector declined in
March.

Also as IPE pointed out last September that the retirement situation in Italy is typically complex.

By comparison, the statutory retirement age in 2019 will be 67. This keeps rising, as planned by law, to keep up with demographic projections. In reality, however, people on average retire at about the age of 62. This is the result of the complicated legislative framework, which effectively means every worker’s personal circumstances can contribute to bringing his retirement age forward.

Also the current government has plans to reduce the official retirement age.

Returning to the employment data we see that the situation is turning as previously there had been rises.

Employment rose by 0.5% (+113 thousand) compared with February 2018. The increase concerned men
and women, involving people aged 25-34 years (+21 thousand) and over 50 (+316 thousand).

Unemployment

There was something of a double whammy in the labour market in February.

In February, the number of unemployed persons rose by 1.2% (+34 thousand); the increase involved men
and women and persons aged over 35. The unemployment rate grow up to 10.7% (+0.1 percentage
points), while the youth rate slight decreased to 32.8% (-0.1 percentage points).

So both unemployment and the unemployment rate rose. There is also something of a swerve familiar to regular readers of my work which is that the unemployment rate in January was reported originally at 10.5%. However it is now reported as being up 0.1% at 10.7%. So the impression is given that it is 0.1% up when in fact it was worse in January and is now worse than that or if you like the rise is 0.2% against the original. The fall in youth unemployment is much more welcome but it is hard not to have a concern about the way that it is still 32.8%. In fact there are two concerns to my mind. Firstly that it too may start to rise as prospects weaken and secondly along the signs of the song from Ace.

How long has this been going on?
How long has this been going on?

There must be more than a few in the youth unemployment numbers who have been unemployed for years and must feel like giving up.

Over the past year the decline in unemployment now looks rather marginal.

On a yearly basis, the growth of employment was accompanied by the fall of unemployed persons (-1.4%,
-39 thousand) and inactive people aged 15-64 (-1.3%, -169 thousand).

Actually I can go further as the three-month average looked like it was heading to 10% and did make 10.25% if I stare hard at the chart. But the reality was that the response to the relative boom was already over and the unemployment rate was turning and then rising.

Two lost decades?

A research paper from Italy’s statisticians suggest two linked and thereby troubling trends especially for the south.

 Both qualifications of the latter manual type show, in the twenty years, a considerable increase in the stock of employees that exceeds the growth of the
employed people who carry out work with higher qualifications. Also on the positive side of the variations, there are clear territorial differences that have a
different impact on the employment balance for Italy and for the South, where the contribution to the medium-high and high qualification employment is less than one third of
the contribution given by this work to the employment of the Country.

This is a version of my “Good Italy: Bad Italy” theme where the south in particular has seen quite a deterioration in the quality of employment and in particular skilled manual work has been replaced by non-skilled.

Official economic surveys

As you can see these bring maybe a little hope as they give opposite results.

In March 2019, the consumer confidence index decreased from 112.4 to 111.2. All of its components worsened: the economic, the personal, the current and the future one (from 126.4 to 123.9, from 108.2 to 106.8, from 109.4 to 107.8 and from 116.9 to 115.9, respectively).

With regard to the business surveys, the business confidence index (IESI, Istat Economic Sentiment Indicator) bettered from 98.2 to 99.2.

The business sentiment gain came mostly from the services sector.

Comment

There was a time around six months ago that the Italian government was talking about economic growth of 2% and in some extreme cases 3% where yesterday we were told this. From Reuters.

 Italy can’t afford fiscal expansion at a time when its economic growth is heading to close to zero, Treasury Minister Giovanni Tria said on Sunday.

Tria said Italy was in a phase of economic slowdown and could not consider introducing restrictive measures. He was speaking at a conference in Florence, and his remarks were carried on Italian radio stations.

“Certainly we don’t have the room for expansionary measures,” he then added.

Actually the official data has shown it to have been at zero in the year to the last quarter of 2018 and we now fear that it is contracting.. Any decline this quarter will put Italy into yet another recession and the number-crunching is not favourable.

The carry-over annual GDP rate of change for 2019 is equal to -0.1%.

Meanwhile over to the banks National Resolution Fund and its 2018 accounts.

The main results of the annual accounts for the year ended 31 December 2018 are as follows:

  • Assets € 429,869,033;
  • Liabilities € 972,900,609;
  • Endowment fund (excluding the result for the year) € (484,918,684);
  • Net result for the period € (58,112,892);
  • Endowment fund at 31 December 2018 € (543,031,576).

The negative net result for the period is largely attributable to:

  • Interest expense € (31.4 million);
  • Allocations to the provisions for risks € (26.5 million).

How does a negative endowment fund work?