Italy continues to see features of an economic depression

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by Shaun Richards

Today gives us an opportunity to compare economic and financial market developments in Italy as this week has brought some which are really rather extraordinary. Let us start with the economics and look at the IMF ( International Monetary Fund ) mission statement yesterday.

Real GDP growth in 2019 is estimated at 0.2 percent, down from a 10-year high of 1.7 percent in 2017.

As you can see they are agreeing with my theme that Italy struggles to sustain any rate of economic growth above 1% per annum. Then they also agree with my “Girlfriend in a Coma” theme as well.

 Real personal incomes remain about 7 percent below the pre-crisis (2007) peak and continue to fall behind euro area peers. Despite record employment rates, unemployment is high at close to 10 percent, with much higher rates in the South and among the youth. Female workforce participation is the lowest in the EU.

The real income situation is particularly damning of the economic position especially if we note that unemployment has continued to be elevated. That brings us back to the economic growth not getting above 1% for long enough for unemployment to fall faster.

What about now?

The IMF has a go at saying things will get better but then lapses into the classic quote of a two-handed economist.

The economic situation is projected to improve modestly but is subject to downside risks.

So let us see if the detail does better than it might go up or down?

Real GDP growth is forecast at ½ percent in 2020 and 0.6-0.7 percent thereafter. These forecasts are the lowest in the EU, reflecting weak potential growth. Materialization of adverse shocks, such as escalating trade tensions, a slowdown in key trading partners or geopolitical events, could lead to a much weaker outlook.

As you can see there is not much growth which frankly in measurement terms would take several years even to cover any margin of error. I also note a rather grim ending as the IMF maybe gives us its true view “could lead to a much weaker outlook.” Another slow down or recession would be a real problem as we note again that real personal incomes are 7% lower than before. If that is/was the peak then how long will this economic depression go on?

The Euro zone

If we look wider for en economic influence the news is not that good either. For example the situation from the overall flash Markit PMI business survey was this.

The ‘flash’ IHS Markit Eurozone Composite PMI®
was unchanged at 50.9 in January, signalling a
further muted increase in activity across the euro
area economy. The rate of expansion has remained
broadly stable since the start of the final quarter of
2019, running at the weakest for around six-and-ahalf years.

If we now move to my signal for near-term economic developments the ECB told us this yesterday.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 8.0% in December from 8.3% in November.

The money supply situation had improved in 2019 but as you can dipped at the end. So the impetus is weaker than it was. In case you are wondering we have seen this before in phases of QE which is currently 20 billion Euros a month and thus boosting the numbers. There are other influences as well.

The broader money supply had a sharper fall and represents the outlook for 2021/22.

The annual growth rate of the broad monetary aggregate M3 decreased to 5.0% in December 2019 from 5.6% in November, averaging 5.4% in the three months up to December.

We will have to see if this is a new development or just a financial market glitch.

The annual growth rate of marketable instruments (M3-M2) was -7.2% in December, compared with -1.1% in November.

Back to Italy

The troubled area across much of the world is the industrial sector and the latest we have on that is this from the Italian statistics office.

The seasonally adjusted volume turnover index (only for the manufacturing sector) remained unchanged
compared to the previous month; the average of the last three months increased by 0.3% compared to
the previous three months. The calendar adjusted volume turnover index increased by 0.2% with respect
to the same month of the previous year. ( November )

This morning there was troubling news for those of us who have noted that employment has often been a leading ( as opposed to the economics 101 view of lagging) indicator in the credit crunch era.

The estimate of employed people decreased (-0.3%, -75 thousand); the employment rate went down to
59.2% (-0.1 percentage points).
The fall of employment concerned both men and women. A rise is observed among 15-24 aged people (+6
thousand), people aged 25-49 decreased (-79 thousand), while people over 50 remained stable.

This meant that if we look for some perspective progress seems to have stopped.

In the fourth quarter 2019, in comparison with the previous one, a slight increase of employment is registered (+0.1%, +13 thousand) and it concerned only women.

We will have to see if that continues as we worry about possible implications for this.

The number of unemployed persons slightly grew (+0.1%, +2 thousand in the last month); the increase
was the result of a growth among men (+2.2%, +28 thousand) and a decrease for women (-2.2%, -27
thousand), and involved people under 50. The unemployment rate remained stable at 9.8%, as also the
youth rate, unchanged at 28.9%.

Italian bond market

If we return to the IMF statement the story starts badly.

 Italy needs credible medium-term consolidation as fiscal space remains at risk.Debt is projected to remain high at close to 135 percent of GDP over the medium term and to increase in the longer term owing to pension spending. If adverse shocks were to materialize, debt would rise sooner and faster.

Somehow in the current economic environment the IMF seems to think that more austerity would be a good idea. Amazing really!

But this week has in fact seen this.

Massive, massive move in #Italy’s 10-year bond yield from 1.44% to 0.95% now. A 50 basis point move in a matter of days party driven by a #Salvini right-wing loss in regional elections. ( @jeroenblokland ) 

These days almost whatever the fiscal arithmetic we see that investors are so desperate for yield they will buy anything and hope the central bank will step up and buy it off them for a profit. Just as a reminder back around 2012 the yield went above 7% on fears the fiscal position suggested Italy was insolvent which of course were self-fulfilling as a yield of 7% made sure it was. But apart from QE what is really different now?

Comment

The depth of the problem is highlighted by this from the IMF.

Steadfast implementation of structural reforms would unlock Italy’s potential and durably improve outcomes. Reforms to liberalize markets and decentralize wage bargaining should be prioritized. They are estimated to yield real income gains of about 6-7 percent of GDP over a decade.

That’s a convenient number isn’t it? But the real issue is that this is a repetition of the remarks at the ECB press conference which are repeated every time. Why? Nothing ever happens.

The longer the economic depression goes on then the demographics become a bigger issue.

The number of births continues to decrease: in 2018, 439,747 children were registered in the General Register Office, over 18,000 less than the previous year and almost 140,000 less than 2008.

The persistent decline in the birthrate has an impact above all on the firstborn children, who decreased to 204,883, 79 thousand less than 2008.

Italy is a lovely country but the economics is an example of keep trying to apply the things that have consistently failed.

The Investing Channel

 

 

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