Paris asks me in comments if I could say something about Italian industrial production. Basically production in August was up significantly (month on month 1.2 percent), but this followed a 0.3% month on month fall in July, so the actual increase is not as large as it seems at first sight. The August reading is undoubtedly in line with the September confidence index reading, but again the big question is, where is all this leading?
The EU commission only today has revised down its first quarter 2007 growth estimate:
The European Commission said the economy of the dozen euro nations may not grow at all in the first quarter of next year amid higher interest rates and a slowdown in the U.S.
The forecast of stagnation is the bottom end of the commission's range of between zero and 0.5 percent growth for the first three months of 2007, which is down from an August estimate of between 0.2 percent and 0.8 percent. The European Union's executive arm also lowered its prediction for growth in the current quarter to about 0.5 percent.
and please note this:
``The data is further suggestion that after reasonable growth in the second half of this year there may be a more meaningful slump at the start of next year,'' said Ed Teather, an economist at UBS AG in London.
Part of the reason for the mid-summer surge in activity in the eurozone was an increase in construction activity in Germany which was brought forward to avoid the forthcoming 3% increase in VAT.
The August data is now somewhat old, and all the signs are that the Eurozone has peaked. This situation will only be made worse by the ECB's obsession with raising interest rates, counter cyclically. The future is additionally complicated by the fact that during the good years (2001- 2006) several major European economies used pro-cyclical fiscal policy, and they will now have to move in the direction of tightening at just the time when an expansionary fiscal policy is just what is called for. As you make your bed, so shall you lie, as they say.
Also it is important to take into account what is happening in the services sector, where again a slowdown is also making its presence felt:
Euro zone services growth slipped to a 10-month low in September, a survey showed on Wednesday, but analysts said this won't stop the European Central Bank raising interest rates this week and again later this year.
The RBS/NTC Research survey of 2,000 companies, ranging from financial services to hotels, showed business in the euro zone's dominant services sector remained robust, but eased for the third consecutive month.
The euro zone services activity index fell to 56.7 in September from an upwardly-revised 57.4, still well above the 50 mark that separates growth from contraction. Economists had expected a stable reading of 57.0.
That left the index at its lowest level since November 2005 and puts it sharply lower than a World Cup-related high of 60.7 in June, with a slowing in input cost rises and the rate of growth in new business.
It is important here to remember that in a developed economy services make up around 70% of total economic activity (with industry accounting for around 25% and agriculture around 5%). So services are really a much more important indicator than industrial activity. Clearly services activity is still growing, but the rate of expansion is slowing.
All in all it is important to remember that one swallow doesn't make a summer, and above all that Rome certainly wasn't built in a day.
Italy Economy Real Time Data Charts
Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Italy related comment. He also maintains a collection of constantly updated Italy economy charts together with short text updates on a Storify dedicated page Italy - Lost in Stagnation?
6 comments:
Oh for crying out loud. The Italian data was unreservedly good. Industrial Production was much stronger than expected and very strong over the year. Whatever revisions may have been made were MINOR. The Italian Trade Account is back in surplus, Retail Trade is up, Italian Consumer Confidence is up. There is some concern at the broader European level that growth will taper off towards the end of the year. The concern appears to be anchored in concern about the potential for a GLOBAL economic slowdown to take hold as Anglo economies fold under the weight of accumulated private sector debt.
The ECB continues to talk about a broadening in economic growth in the EuroZone. We have had good numbers out of Germany and France. Why can't you AT LEAST report the data? All of it and stop trawling for something which you can put a NEGATIVE spin on. It's such an amateurish way of presenting data.
Get the data. Present it. Then think about it and comment. But at the very least if you are going to have an Italian economig blog, report the statistics!!
Please stop trying to make the data fit your view. It's unscientific and unprofessional.
Following news agencies, you also overstate the EU commission's growth estimate for Q1 2007: The commission said that its mechanical growth indicator now shows growth between 0 and 0.5 percent qou at the beginning of next year.
First, you should note that this is quite a big range, meaning an annualized increase of between 0 and 2.0 percent - which might be quite away from stagnation. There is no indication that the probability is high that growth will come out at the lower end.
Second, and more importantly, you should remember that the commissions growth indicator is notorously unreliable - in addition to its vast forecast range. In July 2006, the indicator stood at 0.4 to 0.8 percent for Q2. The outcome was 0.9 percent which might even be revised to 1.0 percent...
Hi you two and thanks for the comments.
Paris:
"The Italian Trade Account is back in surplus, Retail Trade is up, Italian Consumer Confidence is up. There is some concern at the broader European level that growth will taper off towards the end of the year."
First off there is no doubt that the Italian economy, like the rest of the eurozone economies has had a fairly good year (by eurozone standards, lets not exaggerate in an international context). In fact it has had a much better year than I anticipated (in the sense that it may come out with what 1.5% growth while I was expacting something in the 0,5 - 1% range, 2006 was never going to be a recessionary year).
The reasons why this has happened are open to debate.
The main simple point I would make is that this needs to be contextualised in terms of trend growth in Italy, which has been dropping by 1% per annumum per decade.
ie in the 1950s trend growth in Italy was around 5%, and by the 90s it was down to 1%. The first decade of this century it may hover in the 0 to 1% range and then start to move off into negative territory in the next decade.
So what I would like to see is some argument about what is going to reverse this long term and historic (and IMHO demographically driven) trend. A few months of good PMIs don't really change things one way or the other here.
Sebastian
"you also overstate the EU commission's growth estimate for Q1 2007"
Well I'm not sure whether I overstate or understate, since I simply quote Bloomberg. You are right of course that the forecast is in a very broad band and that the ECB forecasts are not the most reliable of things. Really I should have put all this better.
I am simply suggesting that *even* the ECB, who have previously IMHO been far too optimistic about 2007 are now recognising that things are slowing, and they are hedging their bets so they don't have too much egg on their face if things go the other way.
I am hedging, but within a much narrower band. Now lets see who is right.
With interest rates up (and remember the lags here) and fiscal tightening about to lock in, and a downwardly trending core rate of GDP growth, recession is certainly a possibility in Italy in 2007 (that's the hedge, a *possibility*). This is what I am saying, and the comparatively better data for earlier this year doesn't change anything on this.
There is a business cycle, things do go up and down, my guess is we are now entering the downcycle (this is ther *narrow band of the hedge* and this isn't news to you Sebastian, I was arguing this to you over a month ago, my feeling is that what we have seen since has rather gone my way).
Of course Italy will eventually again emerge from the next recession, but trend growth will be once more lower, for the reasons I have been arguing.
So the big issue is: what are the policies that can reverse the decline in trend GDP growth in Italy?
There is only one long term economic decline going on in the world right now and that is happening in the United States, unimpeded by population growth, credit growth and net migration. The long term decline in the United States is ALL OVER the net. Try: Whiskey and Gunpowder, The Angry Bear, The Daily Reckoning to name just a few who are working and writing from the United States. There are many, many others.
I am well aware that you have no direct experience with Italy or the evolution of the Italian economy over time. However, let me just point out that Italy's industrialisation has been a success story and living standards have continued to RISE in Italy over the past few decades. Your desire to cherry pick data and look for non-existant long term trends is simply laughable.
No-one is saying that the EuroZone economy is perfect or that the institutions behind it work perfectly. What is clear, at least to me, is that the Europeans on the whole have a much better idea of HOW TO RUN AN ECONOMY than do the Anglo-Saxons. Despite what some commentators suggest, the EEC has been a success which is why Britain tried to join before eventually being accepted.
Update: according to the ISAE forecasts (audition to Budget Comitee held on 10.11.2006), the industrial output index should growth at 1,2% pace YtY for the III quarter, and at moderate pace in the IV quarter.
These indicators will cause the 2006 GDP growth rate to be revised: +1,8%.
Original document [in italian]:
http://www.isae.it/AUDIZ_11102006.pdf
Cheers
Vittorio
Hi Vittorio,
Thanks for the pointer to the data, I will try and get back to it later in the week.
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