Italy looks set for stagflation and recession

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by Shaun Richards

It is time for us to look again at the economy of Italy. We approach it from our “Girlfriend in a Coma” theme where years and indeed decades of slow, low and at times no economic growth have left it vulnerable. So let us look at the latest economic growth numbers.

In the first quarter of 2022 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.2 per cent with respect to the previous quarter and increased by 5.8 per cent over the same quarter of previous year.

So the economy had been growing but that is now over and the pattern was not hopeful as services weakened and inventories rose.

The quarter on quarter change is the result of an increase of value added in agriculture, forestry and fishing, a decrease in that of services and a stationarity in industry. From the demand side, there is a positive contribution by the domestic component (gross of change in inventories) and a negative one by the net export component.

The overall theme here is a sadly familiar one. This is because if we look back we see that the Italian economy was struggling even before the pandemic such that the previous quarterly GDP peak was in the second quarter of 2019 at 433.5 billion Euros. The latest number was 428.3 billion or some 1.2% below and getting further away.

Inflation

There was some minor relief in April but the 2022 inflation boom is in evidence.

In April 2022, according to preliminary estimates, the Italian harmonised index of consumer prices (HICP) increased by 0.6% on monthly basis and by 6.6% on annual basis (from +6.8% in March).

Italians may well be focusing on the price of food.

Prices of Grocery and unprocessed food increased by 1.5% on monthly basis and by 6.0% on annual basis (up from +5.0% in the previous month).

Although if you can avoid both food an energy things improve.

Therefore, core inflation (excluding energy and unprocessed food) was +2.5% (up from +1.9% in the previous month) and inflation excluding energy was +2.9% (up from +2.5% in March).

As you can see below the heat is on if we switch to producer prices.

In March 2022, compared with the previous month, industrial producer prices increased by 4.0%. On domestic market producer prices increased by 4.7%, on non-domestic market they increased by 1.7%.

Over the last three months, compared to the previous three months, industrial producer prices rose by 12.7% (+15.8% on domestic market, +3.5% on non-domestic market).

In March 2022, compared to the same month a year ago, industrial producer prices increased by 36.9% (+46.5% on domestic market, +12.2% on foreign market).

Wages

There is an ominous note from the collective bargaining system.

In March 2022, the hourly index and the per employee index increased both by 0.1% from last month.
 Compared with March 2021 the hourly index and the per employee index increased by 0.7%.
 In the period January-March 2022 the hourly increased by 0.6% and the per employee indices grew by 0.7%
y/y

As you can see the index has been left well behind by inflation with real wages over 5% below where they were last year. It covers a solid chunk of the workforce.

44.6% % in terms of employees and 45.7% in terms of the total amount of wages.

Looking Ahead

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The Bank of Italy suggested in January that economic growth would be 3.8% this year and inflation 3.5% but that has long been overtaken by events. On Friday it told us this about the Euro area.

In April €-coin is diminutive (to 0.61 from 0.77 in March).

Believe it or not that is higher than when we were in the “Euro Boom” so I think we learn more from the direction of travel which is lower.

Both the reduction in confidence climates – of the
businesses and, to a greater extent, households – both the raising of the curve of bond yields of the euro area.

It’s April effort for Italy looks extraordinarily optimistic too.

In the intermediate scenario, formulated on the assumption that hostilities will continue, GDP would rise by around 2 per cent in both years; inflation would be equal to 5.6 and 2.2 per cent.

If we switch to the Markit PMI it seems to have lost touch with reality.

The Italian services sector registered another strong
performance during April, with the rates of expansion in
business activity and new work accelerating to five-month
highs amid reports of stronger demand conditions, which
were also reflected in a rebound in new export business.

That is a service sector which was so “strong” in the forest quarter it shrank. Somehow or other they manage to report this.

Nonetheless, the more resilient service sector has allowed the economy to remain firmly on a growth footing, according to the PMI data, as we move further into the second quarter of 2022.

They did at least manage to record the rise in inflation.

Costs faced by Italian services firms continued to rise steeply in April, with the rate of increase easing from March’s peak but still the second-fastest on record.

Meanwhile EURACTIV points out this.

Meanwhile, Italy’s industry has seen a drop in production due to the Russia-Ukraine war, the energy crisis, and tensions over commodity prices.

Industrial production dropped 1.6% in the first quarter of 2022, according to a report released on Saturday (7 May) by Confindustria, the main association representing manufacturing and service companies in Italy. Production even dropped 2.5% in April, when the price of natural gas saw a 698% increase compared to pre-pandemic levels.

Energy Problems

Italy is very dependent on Russia.

Italy currently imports about 29 billion cubic metres of gas per year from Russia.

If Russia decides to cut its gas supplies to Italy, the government has already signed agreements with countries in Africa to diversify its imports.

“Under the deals, 25 billion cubic metres are ensured from 2024 onwards. This means that a large part of the work has been done,” announced Cingolani. ( EURACTIV)

Banks

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Whatever happens we find that it hits an Italian bank who are to say the least accident prone.

MILAN, May 6 (Reuters) – Italy’s biggest bank Intesa Sanpaolo (ISP.MI) on Friday cut its profit guidance for the year after setting aside 800 million euros ($847 million) to cover potential losses from its exposure to Russia.

Also there is more from what feels like a never ending story.

ROME, May 5 (Reuters) – Italy is beefing up a 1.5-billion-euro ($1.6 billion) money pot destined for state-owned bank Monte dei Paschi di Siena (MPS) (BMPS.MI), three sources close to the matter said, adding it was still unclear by how much it would increase it.

Comment

Italy must be close to recession if it is not already in one and I struggle to understand what the various surveys think they are recording? So stagflation is rife and if we look at the pattern for real wages there is a real risk of a considerable contraction which is why the government is doing this.

ROME (Reuters) -Italy unveiled a hefty package of measures on Monday aimed at shielding firms and families from surging energy costs as the war in Ukraine casts a shadow over the growth prospects of the euro zone’s third largest economy.

The decree approved by Mario Draghi’s cabinet deploys 14 billion euros ($14.71 billion) of stimulus, ranging from state guarantees on bank loans to a one-off “bonus” of 200 euros for millions of low and middle-income Italians.

This brings us to the issue of debt and bond yields.

 In 2022, the deficit and the debt will stand at 5.6 and 147.0 per cent of GDP respectively and will then decrease to 2.8 and 141.4 per cent in 2025. ( Bank of Italy)

That of course is based on its extremely optimistic growth forecasts. Meanwhile the ten-year yield has risen to 3.2% which tightens the screw. Care is needed because this is different to the Euro area crisis when it reached 7%. Because of the level of inflation ( which boosts taxes) Italy can afford this but its people will have quite a cost of living crisis as the stress is particularly on real wages.

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