Italian June Retail Sales

Well, in many ways I don't find this surprising, but I do think it is relatively important:

Italian retail sales in June fell at the fastest pace in 15 months as higher borrowing costs and rising taxes left households with less money to spend.

A seasonally adjusted gauge of retail sales fell to 46.5, the lowest since March 2006, from 47.7 in May, according to a survey of 440 retail executives compiled for Bloomberg LP by NTC Economics Ltd. The reading held below 50, the level that signals a contraction in sales, for a fourth month.

So a combination of higher energy costs, higher interest rates, a high euro and higher taxes are all finally taking their toll, as I think it was quite predictable that they would. The recent consumer confidence reading would seem to offer additional confirmation.

And all of this is just one more reason why this wasn't very good news. The fiscal deficit issue, is, unfortunately, at some point going to rear its ugly head again.

Consumer confidence in Europe's fourth-biggest economy dropped this month to the lowest in a year as optimism was choked by the higher borrowing costs and rising energy prices, a report showed last week. Crude oil prices have risen 12 percent this year and are trading at almost a $70 barrel, boosting the cost of electricity and gasoline. Bills for housing, water and electricity increased 2.5 percent in May from the same month a year ago, government statistics show.


The drop in confidence and retail sales may weigh on growth in a country where consumer spending accounts for two-thirds of the $1.8 trillion economy. Italy has already trailed behind the euro region for 11 years and growth will lag behind this year, as well. The euro-area economy will expand 2.6 percent in 2007 while Italy will grow 1.9 percent, the European Commission forecasts.

Italian retailers fared worse than their European neighbors, according to today's report. In Germany, the euro area's biggest economy, the retail index rose to 49.2 from May's three-month low of 47.3. In France, the index fell to 48.2 after 14 consecutive months of growth. Those declines led European retail sales to fall for a second month.

Budget Deficit Target

Well, this doesn't sound like good news:

The Italian government is set to increase its 2007 budget deficit target, a victory for coalition leftists who want more public spending....In what would be a big boost for the left wing of Romano Prodi’s centre-left government, which has criticised the economy minister’s insistence on budget rigour, the 2007 deficit target would be increased to 2.5 per cent of gross domestic product from the current 2.3 per cent forecast.


Now certainly the projected change does not appear to be massive. As Anna Finocchiaro says "in terms of percentages, we’re talking about tenths of a percentage point", but then again we are talking about forecasts, and economic growth may yet turn out to be below expectations, in which case the deficit would come in above target. Really - at this point - it is a question of the signals you send. And again, in the background, there is this:

The government is consulting unions on how to alter pension reforms, passed under the former centre-right administration, to raise the retirement age.

Now it is not that I am looking for draconian cuts simply for the sake of them, but the key question is the sustainability of Italian government finances, and in the somewhat shorter term there is this to think about.