Italy Services PMI March 2008

Italy's service sector continued to contract for a fourth consecutive month in March, though the rate of contraction was less than February's record rate, as employment fell and input prices rose at their fastest pace on record, according to the latest NTC/ADACI survey publised today. The NTC Research Purchasing Managers Index, which covers companies ranging from hotels to insurance brokers, rose to 48.8 from February's 47.2. Despite the recovery from February's all-time low, March's reading remained below the 50 divide between growth and contraction for the fourth consecutive month.




It is hard not to draw the conclusion that Italy is now in recession.

"These figures, coupled with the manufacturing PMI, suggest Italy's economy has started to contract," said Chris Williamson, chief economist at NTC Research which compiles the data. "It's hard to see any silver lining and it doesn't seem the worst is over by any means," he said, forecasting Italian gross domestic product fell 0.1 percent in the first quarter.

The March PMI for Italian manufacturing fell to 49.4, again below the 50 threshold, the first time Italian industry has shown such a reading since June 2005; business confidence as measured by the ISAE institute also hit a 31-month low in March; and consumer confidence was the lowest since May 2004. In addition the seasonally adjusted PMI for retail sales collapsed to the staggeringly low level of36.4 in March from the already very weak level of 43.8 registered in February.

The PMI services survey that showed the sub-indexes for new and outstanding business both rose but remained below the 50 line while the employment and confidence components dropped.

"Business expectations remain the second weakest since September 11, 2001 and they are getting entrenched at this level," said Williamson. "They have never been so low for so long."

The European Commission has also now reported its eurozone “economic sentiment” indicator for March, with the composite number bouncing back a little from the February reading which its lowest level since December 2005. The indicator, which gauges optimism across all economic sectors and is regarded as a good guide to likely future trends, was back up to 102 after falling to 100.1 in February from 101.7 in January. As we can see in some of the counries shown in the chart below, the picture is a mixed one, with Germany for the time being holding reasonably stable, climbing back to 104 from 103.7 in February (France is also holding up fairly well at 105.6, from 105.2 in February), Ireland hovering, Italy continuing its steady downward path, and Spain continuing to head steadily off the map. The March reading in Spain was 83.9 which was down from 87.5 in February. I suppose here it is a case of how low can you go before you hit bottom. Yet awhile I suspect. So I guess in Italy there is at least some consolation: bad as you are, you are far at this point from being the worst case scenario. But this is not really much in the way of consolation. And especially not when we start to think about all those government debt financing issues which are looming just round the next corner.

Italy Manufacting PMI March 2008

Well, as they say colloquially, it never rains but it pours, and this seems to be a very adpt description of Italy's current economic predicament, and one piece of bad news simply piles right up after another. This time it is Italy's manufacturing industry which is coming under the anvil, since it contracted in March for the first time in nearly three years as output slowed to near stagnation and exports declined. At least this is the picture we can discern from the latest reading given by the NTC/ADACI Purchasing Managers' Index, which measures activity in the manufacturing sector, and which fell in March below the 50.0 mark separating growth from contraction reaching 49.4, its lowest level since June 2005.

"The slowdown largely reflected a fall in new orders from both domestic and foreign markets. Operating conditions were further worsened by the fastest rate of cost inflation for 20 months," NTC/ADACI said. NTC Research chief economist Chris Williamson said the figures were consistent with stagnation in the first quarter and added there could be a worsening in the second quarter given the fall in new orders.

The seasonally adjusted output index fell to 50.4 from 51.3 in February, reflecting the slowest rate of expansion in the current period of growth and down sharply from the average of 55.2 seen last year. Citing inflation reducing customer purchasing power, fewer than 26 percent of companies surveyed reported output growth. Output prices, at 57.8, rose at their fastest rate since October 2006 while the input price index, at 69.0, was at its highest since July 2006.

The strong euro/dollar exchange rate and uncertainties in the global economy were blamed for the export downturn which saw Italian exports stagnate in February and decline in March, with that index at 48.7, a level not seen since May 2005. The worst-hit sector was consumer goods where output contracted for the fourth month running. Investment goods output grew at a faster rate than in February while intermediate goods grew at a slower pace than in the previous month.

The PMI is the latest in a string of data pointing to a serious downturn in the Italian economy. Business confidence hit its lowest for 31 months in March and consumer morale was at its lowest in almost four years.

Italian Inflation March 2008

This is not good news at all. According to preliminary data released today by ISTAT Italy's inflation rate in March rose to the highest in more than 11 years, driven by gains in energy prices and a surge in the cost of food and housing. Consumer prices calculated by European Union standards rose 3.6 percent from a year earlier, up from last month's 3.1 percent rate, which had previously been the highest rate since the index was created in January 1997.



Consumer prices rose 1.6 percent in March from February, which is a very rapid rate indeed (annualised 18%). The rate of price increases has clearly accelerated and Italy - which has very low economic growth at this point (probably near zero, or worse) - could be said to be suffering from some variant of stagflation. This will not make it at all easy for the ECB to bring any kind of early reflief in the form of rate cuts (which could be just as important for their impact on the current high value of the euro which is crimping Italian exports, as for any easing of lending conditions) in the near future.

Italian transportation costs, which include gasoline, rose 1.4 percent from a month ago, and 5.8 percent from a year ago, based on the statistics institute's calculations. No breakdown was given of the EU-harmonized index. Prices of housing, water, electricity and fuel increased 4.4 percent from a year ago.

Food and beverage costs in Italy rose 0.7 percent from February and 5.5 percent from a year ago, led by increases in the prices of bread, cereal and pasta. Cereal costs rose 10 percent, bread was up 13 percent and pasta prices jumped 17 percent from a year ago. Fruit rose 6 percent and milk went up 10.5 percent.