One of our long-running economic themes has pushed itself to the fore again. It is the “girlfriend in a coma” theme for the economy of Italy where in a nutshell it joins in with the various problems ( Covid, credit crunch and Euro crisis) but not with any recovery as economic growth rarely goes above 1% for any length of time. In essence that is how it ended up with yet another imposed technocratic leader like Mario Draghi but we will leave the politics there which is convenient because it looks rather a confused mess.
Inflation
This morning’s official release brought more grim news on this front.
The harmonized index of consumer prices (HICP) increases on a monthly basis by 1.2% and by 8.5% on an annual basis (from + 7.3% in the previous month), confirming the preliminary estimate.
Even worse it is higher for those least able to afford it.
In the second quarter of 2022, the impact of inflation, measured by the HICP, is larger on households with lower spending power than those with higher spending levels (+ 9.8% and + 6.1% respectively).
In terms of detail Italy has its own inflation measure which tells us this.
In a context of widespread inflationary tensions, the further acceleration of the growth on a trend basis of the general consumer price index is mainly due on the one hand to the prices of energy goods (whose growth went from + 42.6% in May to + 48.7%) and in particular of non-regulated energy (from + 32.9% to + 39.9%; the prices of regulated energy goods continue to record a very high but stable growth at + 64.3%)
The energy issue is of course little surprise. I see that the Italian statistic office also noted this on its Twitter feed.
The prices of food, household and personal care goods accelerate from + 6.7% to + 8.2%.
That is further broken down here.
and on the other hand to those of food goods, both processed (from + 6.6% to + 8.1%) and unprocessed (from + 7.9% to + 9.6%), recreational, cultural and for personal care (from + 4.4% to + 5.0%) and for transport services (from + 6.0% to + 7.2%).
So as you can see the Italian worker and consumer is feeling the heat of much higher energy and food prices. Although if you are a central banker you will apparently be much better off.
“Core inflation”, net of energy and fresh food, accelerates from + 3.2% to + 3.8% and that net of energy goods alone from + 3.6% to + 4.2% .
More seriously I am pleased that the “core inflation” scam has been shown up for what it is. If they really believed it they would be pressing it now rather than going rather quiet on the subject. They plainly fear another “I cannot eat an I-Pad” moment.
Whilst the inflation mostly remains in the goods sector the danger is that services inflation really picks up too.
On an annual basis, both the prices of goods (from + 9.7% to + 11.3%) and those of services (from + 3.1% to + 3.4%) accelerate; therefore, the negative inflation differential between the latter and the prices of goods widens (from -6.6 in May to -7.9 percentage points).
House Prices
Ironically for once these look as though they would not be one of the leaders of the pack in inflation terms.
According to preliminary estimates, in the first quarter of 2022 the house price index (IPAB) purchased by households, for housing or investment purposes, increased by 1.7% compared to the previous quarter and by 4.6% compared to the same period of 2021 (it was + 4.0% in the fourth quarter of 2021).
Care is needed though because over the period I have been analysing Italy it has avoided the house price booms seen elsewhere. Now whilst the central bankers may cheer and claim “wealth effects” I fear we are seeing a phase where Italy joins the trend for house prices to become more and more unaffordable.
In its own way the statistics office confirms this.
the data for the first quarter of 2022 confirms and consolidates the growth trend in house prices that started in the third quarter of 2019. In particular, the prices of existing houses, which weigh heavily. more than 80% on the aggregate index, recorded the highest trend growth rate since the IPAB time series was available (+ 4.5%).
The economy
A lot of 2022 is going to be around real wages and this looks ominous for Italy.
Update on negotiated wages. German data still going nowhere in June. Pay growth in other large EZ countries is picking up to ~pre-pandemic levels with Italy clear laggard. Q2 EZ wages shld slow sharply after the Q1 spike based on national data. ( @OliverRakau )
Looking at his chart negotiated wage growth was not even 1%. There is more precision below.
Negotiated wages in the single-currency area rose 2.8% in the first quarter from a year earlier, driven by a 4% gain in Germany. In Italy they increased just 0.6%. ( Reuters)
This phase simply adds to the problem of the “girlfriend in a coma” era.
The pattern is familiar. Organisation for Economic Cooperation and Development (OECD) data on inflation-adjusted wages in 22 European countries shows that between 1990 and 2020, pay rose 6% in Spain and over 200% in the Baltic states. Italy was the only country where wages fell, registering a 3% decline.
Often we look at the unofficial economy as a type of economic relief for Italy but not in this area.
A large shadow economy is part of the picture. Some Italians, especially in the poor south, top up regular jobs with casual work which does not show up in official wage statistics, and is usually even more badly paid.
Parini, a passionate climber, has spent several winters working at Alpine resorts. Like many hospitality sector jobs, they were all paid at least partly “cash-in-hand”. ( Reuters)
Comment
We can now switch to another stress point which is the bond market and what Italy has to pay to fund itself. It’s debt is more than 150% of GDP which means this.
#Italy spends over €60bn in government debt interest payments annually. An amount that could be reduced with political stability and spent on education and investment. ( @valentinaromei )
We have not got here by overspending in the conventional sense we have mostly got here via lack of economic growth. As you can see from the analysis above that looks set to get worse rather than better. Valentina works for the FT which may explain the more obvious way that Italian debt costs may fall.
The European Central Bank will unveil an unlimited bond-buying tool next week to help markets better adjust to steeper and faster interest-rate increases than previously thought, economists surveyed by Bloomberg say.
Almost 80% predict the instrument, known as the Transmission Protection Mechanism, will carry light conditions for governments it’s used to help. Nearly all expect the liquidity its purchases create to be reabsorbed in a process called sterilization. ( Bloomberg )
I suppose the “light conditionality” means that there is some gain from having a former ECB President as Prime Minister ( assuming he still is…). But it is no solution at all for the “girlfriend in a coma” problem and by making a crisis appear normal may even make it worse.
Along the way I suppose that it is kind of them to confirm my argument that QE in the Euro area sings along with Queen.
I’m having such a good time
I’m having a ball
(Don’t stop me now)
If you wanna have a good time just give me a call
(Don’t stop me now)