One of the routes that human emotions take when confronted with a problem starts with anger and then goes to denial. If there was an element of anger in the election of the so-called populist government in power in Italy then we have seen denial on a grand scale towards the end of last week..
Italy PM Conte: The country’s economic fundamentals remain strong.
That is as even the casual observer must be aware of comical Ali status but wait there is more.
#Italy’s PM Says Government Remains Positive on Growth Forecasts || denial #Conte says that “the government is pushing ahead on the implementation of measures that have already been approved, and their effect will contribute to a progressive growth in the second part of the year” || first half is gone, sorry mate. ( @liukzilla )
Italian ministers and prime ministers operating mentally for a land far,far away to coin a phrase of course nothing new, We can recall Prime Minster Renzi recommending the shares of the bank Monte Paschi which collapsed and former finance minister Padoan who continually told us the Italian banks were in good shape as the house burned around him.
What provoked this new phase?
Something of a bombshell was released by the Italian statistics office on Tuesday as it looked at the industrial sector.
In December 2018 the seasonally adjusted turnover index decreased by 3.5% compared to the previous month (-2.7% in domestic market and -4.7% in non-domestic market); the average of the last three months compared to the previous three months decreased by 1.6% (-1.5% in domestic market and -1.8% in non-domestic market).
This is worse than it looks as turnover data includes price rises and whilst there is not much consumer inflation recorded in Italy there is some in the industrial sector.
The total producer price index increased by 4.1% compared with December 2017 (5.2% on domestic market and 1.2% on foreign market).
The situation was also grim if you looked at the likely future.
The unadjusted industrial new orders index decreased by 5.3% with respect to the same month of the
previous year (-4.6% in domestic market and -3.6% in non-domestic market).
A little care is needed as these sort of numbers are volatile but they have impacted at a time when weak numbers were feared and then arrived on an ever larger scale.
There was some good news for Italy in that it avoided a downgrade late on Friday although it came with a familiar message.
GDP growth has stalled as domestic policy uncertainty and weaker external demand has dragged down investment, while private consumption growth has also lost momentum. Fitch forecasts GDP growth of 0.3% in 2019, down from 0.8% in 2018 (compared with the 1.2% we forecast for both years at our previous review in August), with investment growth falling to 0.4% from 3.8% last year.
There are several issues here so let us open with Fitch being wrong again and in the circumstances by quite a bit, But the theme of Italy slowing down from not very much continues and frankly it may still be over optimistic. We do not know what the latter part of 2019 will look like but as we have observed above Italy which was already in recession at the end of last year has slowed further at the opening of this. Also the investment growth in 2018 does not seem to have helped much. However you spin it we return to the “Girlfriend in a Coma” theme.
This would take the five-year average to 0.9%, compared with the ‘BBB’ median of 3.2%, and leave the level of Italy’s real GDP still 3.5% below that in 2007. We continue to assess Italy’s trend rate of growth at around 0.5%.
Considering their changed view on the economy Fitch seems very timid on the subject of their likely impact on the fiscal situation.
Fitch forecasts an increase in the general government deficit from 1.9% of GDP in 2018 to 2.3% this year, and 2.7% next, 0.1pp higher than at our previous review.
The danger here is that the fiscal deficit starts as Paul Simon puts it “slip-sliding away.” For the moment the labour market looks okay as shown by the Monthly Economic Report.
In the labour market, employment stabilized and the unemployment rate decreased only marginally.
But if the recession leads to job shedding then falling tax revenue and higher social security spending can see fiscal numbers deteriorate quickly. I have seen this happen in the UK in the past although fortunately as last week showed the UK is presently going the other way with improvements. This moves us onto the national debt and the emphasis is mine.
Fitch forecasts an increase in general government debt to 132.3% of GDP in 2020 from 131.7% in 2018, driven by lower nominal GDP growth, and a 0.7pp weakening in the primary balance from 2018-2020. This compares with the current ‘BBB’ median of 38.5% of GDP and would leave Italy as one of the most highly indebted sovereigns we rate, exposed to downside risks and with reduced scope for counter-cyclical fiscal policy.
Whilst the increase is only marginal it depends on the rather rose-tinted view of fiscal deficit changes we looked at above. Official projections invariably show the ratio falling in a denial of reality as it keeps going up. Also pressure is being provided by the way that Italian bond yields have risen with the ten-year yield now 2.77%. Whilst that is historically low it is much higher than Italy had started to get used too.
Also there are concerns about the structure of the debt. This starts with the fact that the ECB is no longer buying each month. There is still support from its 368 billion Euros of holdings but relative to the size of the Italian debt pile it bought less than elsewhere as it buys on a ratio (capital key) that relates more to economic performance. Next comes the fact that as well as Italian banks French and German banks piled into Italian debt. It did not turn out to be the “easy money” they hoped for and as FT Alphaville pointed out last April led to some strange developments.
It may seem surprising that the French public bank Société de Financement Local, SFIL, has a very big exposure to the Italian sovereign debt.
But then maybe not so strange.
It was set up following the bankruptcy of Dexia.
Back then this was the state of play, what could go wrong?
The national central bank reports that banks resident in Italy had a total exposure of €626.8bn to the domestic general government in January 2018.
As we look forwards we see that Italy has an active maturity schedule to say the least and should it need more borrowing the heat could be on. This year will be especially busy with some 282 billion Euros of redemptions according to the Italian Treasury.
There is a fair bit to consider and let me add another bit of context via Fitch Ratings.
The competitiveness of the Italian economy held up in 2018. Both export and import volume growth slowed (to 0.3% and 0.7% respectively) in common with eurozone peers, and a somewhat higher income balance also supported a current account surplus estimated at 2.6% of GDP in 2018, 0.2pp lower than the year before.
Looked at in this light the Italian economy looks strong and to that we can add the private savings held. But there is no balance of payments crisis as we mull how all this “competitiveness” does not make the economy do better than it does. Meanwhile money seems to escape none the less.
We forecast some moderation in the size of net portfolio outflows, which totalled 5.1% of GDP in 2017 and 6.7% in 2018, and for net external debt/GDP to remain at close to 51% of GDP in 2020, high relative to the peer group median of 8% of GDP.
So there are clear dangers ahead for Italy and it is not clear to me this will help as they channel their inner Andy Haldane.
Istat updates the Social Mood on Economy Index, the new experimental index first released in October 2018. The index provides daily measures of the Italian sentiment on the economy. These measures are derived from samples of public tweets in Italian captured in real time.
More significant as a hint of ch-ch-changes come from looking at an addition to the basket for inflation measurement.
Maybe that is the most significant factor today if we consider the longer term.