One of the features of the Euro area crisis was that is mostly took place in smaller Euro area nations with the housing and banking crisis that afflicted Spain being an exception. However there began also to be problems in two of the larger nations as France after an initial recovery found the going tough and Italy after a much weaker recovery headed south. Indeed such was the decline that it found itself at the end of the third quarter of 2013 with an economic output running at a level last seen in the year 2000.
So you can see that the Euro area recovery phase which we are now in is particularly important for Italy as it has plenty of lost ground to recover. However we then need to face the reality that even in the good pre credit crunch years the Italian economy struggled to grow at more than 1% per annum. So even if she should return to her performance from then it would be a very long time before Italy returned to the economic output of 2007. This issue became one of the themes of this blog a while back as Italy is certainly a large enough economy to cause problems for the whole of the Euro area should it too require a bail-out.
The official numbers
These showed some hopes of recovery.
In the third quarter of 2013 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) was unchanged with respect to the second quarter of 2013 and decreased by 1.8 per cent in comparison with the third quarter of 2012.
So on a quarterly basis the Italian economy had at least stopped declining although previous declines meant that it was still smaller than a year before. The latest Economic Bulletin from the Bank of Italy tries hard to put a positive spin on things.
The outlook for Italy brightens … - Italy’s GDP stopped falling in the third quarter of 2013, sustained by exports and stock-building, and business surveys and the performance of industrial production suggest barely positive growth in the fourth. The indicators of business confidence rose further in December, regaining the levels recorded at the start of 2011.
Although “barely positive” is hardly exhibiting optimism and if we review the forecasts we see that they are for weak growth.
This year we expect there to be a moderate economic recovery, which should accelerate next year, albeit slightly. After falling by 1.8 per cent in 2013, GDP is projected to grow by 0.7 per cent this year and by 1 per cent in 2015.
So it would appear that even Italy’s central bank only sees a return to pre credit crunch levels of economic growth. This is against the usual optimistic central banking theme and returns us to the concept of it being the sick (wo)man of Europe. As this is the recovery phase we have to wonder if this is as good as it gets?
Today’s data disappoints
The Bank of Italy would have had something better in mind than these figures below.
In December 2013 the industrial production index seasonally adjusted decreased by 0.9% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was +0.7.
As you can see there are fears here that the recovery in industrial production may have stalled. Also we note that it is from a poor base that it is stalling.
The calendar adjusted industrial production index decreased by 0.7% compared with December 2012…in the average of 2013 the percentage change was -3,0 compared with the average of the previous year.
If we look to the underlying indices we see numbers more reminiscent of a depression than a recession. The index was rebased at 100 in 2010 and seasonally adjusted it was at 91.3 and unadjusted it was at 80 in December.
The numbers released this morning took the gloss off the apparent improvement in this area which had begun in August but now shows signs of stalling.
What do the business surveys tell us?
The largest part of the Italian economy has improved but only to a level where it has stopped declining.
Service sector business activity contracted again at the start of the year, although a rise in new work meant that the rate of decline eased to only a marginal pace.
Also ominously if we consider Italy’s elevated unemployment rate the labour market still looks troubled.
The labour market suffered again, however, as firms sought to control costs,
The retail sector still looks mired in a downturn.
Italian retail sales fell again in January, with the rate of decline solid and largely unchanged from that seen in December….The level of sales over the opening month of the year was down sharply on that recorded in January 2013.
The reading of 45.2 was particularly disappointing and leaves this survey in rather a sharp contrast to the official series. As of November we were told that they were up albeit only by 0.1% on a year on year basis. Also the official consumer confidence figures tell us this.
In January the confidence climate index increased from 96,4 to 98,0.
Thus we see a complete contradiction between official and unofficial data in this area. As we mull this it is not true to say that the private-sector surveys are biased against Italy as the most recent report of manufacturing showed an upturn.
Growth in Italy’s manufacturing sector continued into the new year, according to January’s PMI® survey. Production levels rose at a solid and accelerated pace,
So if we review the whole economy in the round things seem to have stopped getting worse but there is little sign of an overall push for the better.
Italy’s banks
It is always the banks is it not? Their role in the credit crunch reminds me of this hit from the New York group Blondie. Younger readers may be more familiar with New Directions take on it.
One way or another I’m gonna getcha, I’ll getcha, I’ll getcha getcha getcha getcha
Such are the issues with Italy’s banks that the Bank of Italy Governor Ignazio Visco has said this over the weekend. From Reuters.
The actions under way at a number of banks to rationalise the management of non-performing loans by creating dedicated structures … go in the right direction,
Why might this be an issue? We get a clue here.
Non-performing loans at Italian banks, the ones least likely to ever be repaid, have reached 150 billion euros…..Visco said the proportion of bad debts, currently at a high of around 9 percent of all loans, was expected to remain stable over the next few quarters.
The figure released today that tell us of a 24.6% increase in bad debts over the past year are not going to improve matters.
Also I note that Italy is not using the UK system for improving bank balance sheets.
In the third quarter of 2013: the House Price Index (see Italian IPAB) decreased by 1.2% compared to the previous quarter and by 5.3% in comparison to the same quarter of the previous year;
On this road we see that the Italian banking sector remains troubled and faces issues with both its corporate and household loan book. So the asset quality review and stress tests of the European Central Bank remind me of the words of Brit Top in the film Snatch “Is this a bad time?” As of the last update bank credit was falling at an annual rate of 4.3%.
The public finances
It used to be true that Italy’s large national debt was considered to be under control to soem extent because it had got a grip on its annual deficits. The Bank of Italy has a go at trying to return us to these times.
General government net borrowing is apparently stable
But if you bother to read more than the headline with its get out of “apparently” you see quite a different picture.
The state sector borrowing requirement rose sharply in 2013, reflecting several extraordinary factors, such as the payment of general government debt arrears related to current expenditures and the lapsing of the effects of the measure on the centralized Treasury account, which had kept the borrowing requirement down in 2012.
However even a annual deficit of 3% of GDP is a problem for Italy and the reason for this is the 2.104 trillion Euros it already owes. This leaves it with a national debt equal to 135% of its annual GDP. Remember when the Euro area told us that 120% was an important threshold?!
Putting it another way we can see why Italy is not keen on putting further public money into its banks. If we move to the UK the figures including the large bank bailouts are as shown below.
The public sector net debt including the temporary effects of the financial interventions, at the end of December 2013 was £2,228.3 billion (134.5% of GDP),
Ironically it is the 55 billion of loans to other Euro area nations that has pushed Italy beyond the UK.
via:http://www.mindfulmoney.co.uk/wp/shaun-richards/the-italian-economy-still-looks-like-the-sick-woman-of-europe/
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