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?

Friday, November 14, 2008

As Italy Enters It's Fourth Recession Since 2000, Who Will Bail-Out Unicredit?

Italy, which is still the eurozone's third biggest economy, slipped into a recession in the third quarter. The Italian economy fell into what is now its fourth recession in less than a decade as gross domestic product shrank 0.5 percent from its level in the second quarter, when it contracted a revised 0.4 percent, the national statistics office said today. This is already Italy's worst recession since 1992, and there is evidently more and worse to come.

Italy effectively followed Germany, Europe's largest economy, in posting two consecutive quarters of contraction -- the technical definition of a recession. Spain contracted on the quarter, while France narrowly avoided recession by posting a slender 0.1% expansion after contracting in the second quarter.

From the third quarter of 2007 the economy contracted 0.9 percent, and this was the sharpest year on year quarterly decline in more than 15 years. ISTAT will provide a detailed breakdown of the GDP figures when it releases its final report on Dec. 12.

The IMF recently forecast that the Italian economy will shrink 0.1 percent this year and 0.2 percent next year, while Italy's employers organisation Confindustria are forecasting a 0.2 percent contraction this year. Making a rough, back of the envelope, calculation, if the economy once more contracts by 0.5 percent in the last quarter, we could be looking at a 0.4 percent contraction this year over 2007, and a year on year drop of around 0.9% again in the last quarter.

The real problem being raised here is not so much the recession itself, but the long term trend growth of the Italian economy in the light of the need to sustain a sovereign debt in the region of 104% of GDP and financing a rapidly ageing population. As can be seen in the long term growth chart below, Italy's growth rate has been steadily dwindling for some time now, and it is clear that this tendency is not going to be reversed any time in the near future.

Very Slender Bank Support Programme

Just how delicate all of this now is is highlighted by Italy's programme to help the banking system cope with the consequences of the global financial crisis, and deal with the impact of the economic unwinding which is currently taking place in Eastern Europe, which was finally approved by the European Commission earlier today (Friday).

The Commission said in a statement that the plan to offer guarantees for new banking debt and other aid was needed to remedy serious disturbances in the Italian economy.

"The Italian guarantee and swap scheme is an effective instrument for boosting market confidence and the commitments we have secured from the Italian authorities ensure that distortions of competition are kept to a minimum," EU Competition Commissioner Neelie Kroes said in a statement.

The Italian government says its conservative banking system has been hit less hard than others by the crisis, but even so the government has offered to swap up to 10 billion euros ($12.5 billion) in government bonds in temporary exchange for other forms of debt held by banks, and in any event it is by no means clear that the Italian banks will not be hit hard by what is now to come in the East of Europe.

This sum the Italian government has set aside compares with the Austrian government's 100 billion euro ($129 billion) banking package. Despite being a small country, Austria has a fairly large exposure to the East European banking system (equivalent on some estimates to 100% of Austrian GDP), but the exposure of Italian banks (and in particular Unicredit) is hardly negligible.

In reality, most of the capital that is being "readied up" in Austria is destined for use in underpining lending in CEE countries including Romania, Hungary, Bulgaria, Poland and the Baltics. As the Eastern Euopean euro-pegs break or the currencies slide, domestic households will have to be "eased of" CHF and euro denominated loans, and the subsidiaries of Austrian, Belgian, Swedish and Italian banks look set to have to eat large loses as a consequence.

"That this is about providing credit to Austrian companies is just a pretense," said Matthias Siller, who manages emerging market funds at Baring Asset Management. "This move is a clear commitment to eastern Europe......But this has nothing to do with charity. Those (Austrian) banks are system-relevant banks in central and Eastern Europe, and if they had to withdraw capital from there, this would set off a landslide," he said.

By tapping their home governments, those banks who have significant CEE exposure effectively lean on taxpayers in their home countries for refinancing countries with large current account imbalances, and large forex household debts. In other words Italian taxpayers are going to have to fund the losses Unicredit and other Italian banks will accumulate on their CEE lending just as the US Treasury is having to fund United States sub-prime loses. The difficulty is, however, that Italian taxpayers are already "in hock" up to their eyeballs, and if people aren't careful Italians could end up paying for some of the CEE loses with part of their future pension entitlements.

This is why this is no simple and ordinary "technical recession" and why the issue of where the money is going to come from to refloat Unicredit should the worst come to the worst, is the NUMBER ONE question facing the European bank bail out at this point in my humble opinion.

Monday, November 10, 2008

Industrial Output Falls Again In September, Making An Italian Recession A Certainty

Italy probably entered a recession in the second half of 2008, International Monetary Fund and European Central Bank board member Mario Draghi indicated last month. After GDP contracted 0.3 percent in the second quarter, ``the most recent indicators confirm negative signs,'' Draghi said on Oct. 21. Europe's fourth- biggest economy will shrink 0.1 percent this year and 0.2 percent next year, the IMF said separately.

Italy's industrial production fell by the most in almost 10 years in September, confirming my impression that Europe's fourth-biggest economy is already in a recession. Output was down a seasonally adjusted 2.1 percent from August, the national statistics office said this morning (Monday).

Year on year, working day adjusted output fell 5.7 percent.

Italy's economy contracted 0.3 percent in the second quarter and is now in the midst of its fourth recession so far this century, or at least all the data we are seeing point that way. Most of the forecasts expect either stagnation (EU commission, Italian government) or contraction (Confindustria) in both 2008 and 2009. The pace of the decline is faster than most of the rest of Europe (excluding Spain), and the slump in sales has forced Italy's largest manufacturer, Fiat, to consider cutting the company's financial goals for the first time since the company returned to profitability in 2005.

Gross domestic product will stall for two years straight after expanding 1.5 percent last year, the European Union's executive arm said in a report published in Brussels today. Italy last stagnated in 2003, according to the national statistics office, Istat.

October Production Also Seems To Have Fallen

Italian manufacturing activity continued to contract - and at the fastest rate in at least 11 years - in October according to the latest Markit/ADACI PMI survey. The Markit Purchasing Managers Index fell to 39.7, its lowest since the series began in 1997, down from 44.4 in September. The Italian manufacturing PMI has now not been above the 50 mark separating growth from contraction since February and the latest data showed activity falling at an accelerating pace as demand shrank while jobs were shed at the fastest rate in the history of the survey. As we can see in the chart, the PMI has been giving a pretty reliable picture, and it looks virtually certain that, at least as far as manufacturing goes, the worst is yet to come.

Other recent indicators have also been far from encouraging, with October business confidence hit its lowest point since September 1993, when the economy seized up after Italy was rocketed out of the European Exchange Rate Mechanism a year earlier.

Falling Retail Sales

Euro-Zone retail sales fell again in October, with the index dropping from 46.2 in September to 44.3 in October, according to the latest retail PMI, the fifth consecutive month of sales contraction and one of the steepest declines recorded since the survey began five years ago. Sales fell in Germany, France and Italy as retailers reported the adverse effects of the global financial market turmoil, rising job market insecurity and stretched household budgets. Italy saw the steepest drop in retail sales of the three countries covered. The rate of decline accelerated sharply during the month with the month-on-month decline in the index the largest yet recorded by the Italian survey. (The index plunged from 42.8 to 34.8).

Confindustria recently said Italy was in "the darkest moment of the economic and financial crisis" and that government action was urgently needed to halt a recessionary spiral, noting in saying so that Italy's huge debt burden acted as a real brake on its options, and who am I to disagree. And is Italy actually in rcession? Well ISTAT are about to publish its first preliminary estimate for Italy's third-quarter GDP on November 14, so we will all soon know.