18th May 2012
This week the vultures have been circling both Spain and Greece in the Euro zone. In some ways the vultures are represented by the ratings agencies as last night 16 Spanish banks were downgraded by Moodys and Greece had her sovereign rating reduced by Fitch to CCC which is embarassing to say the least post her recent debt haircut. As I pointed out on twitter last night the Spanish bank downgrade had all the security of a sieve so it was not a surprise to see her bond yields unaffected first thing today. However Italy has had some bad economic news but has kept relatively under the radar.
The One That Got Away?
As you can see Italy’s Gross Domestic Product figures were very weak.
"In the first quarter of 2012 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.8 per cent with respect to the fourth quarter of 2011 and by 1.3 per cent in comparison with the first quarter of 2011."
So much weaker than expected and a clear drop even if one allows for possible errors. And we note that her GDP is down when compared with a year before which I suppose is not a surprise in a country where it has fallen for three quarters in a row and is therefore officially in recession. If we look for some perspective we see that her GDP in the first quarter of 2008 was 374.1 billion Euros and in the same period this year was 351.8 billion Euros (using 2005 as a base). Ouch! Or a fall of just over 7%.
Why this really matters for Italy
If you look back to my previous updates on her you will see discussion of her persistently low economic growth rate. If you look at her real (chain-linked based on 2000) GDP in 2000 it was 1191 billion Euros and in the mainly good years up to 2008 it rose by the grand total of 8% and in 2010 was 1221 billion Euros so almost back to where it started. So when you read about “lost decades” it is helpful to recall that Italy has just had one rather than being about to start one.
This clashes with Italy’s high level of public-sector debt. Now this is nothing especially new but its national debt to GDP ratio of 120% is now also under pressure from a shrinking GDP in what was supposed to be a recovery. And the debt is rising too albeit more slowly than in many of Italy’s peers. According to the Bank of Italy she owed 1946 billion euros at the end of March which compares with 1897 billion at the end of 2011 and 1842 billion at the end of 2010.
So the problem for Italy has not been one of annual fiscal deficits as she has run a comparatively low one for some time. However at the end of 2011 and early 2012 there have been signs of a pick-up in this. The Bank of Italy produces rolling twelve month deficit figures and they have risen from around 60 billion Euros to above 70 billion Euros. Yes yet again as the supposed austerity noose is being tightened we are seeing signs of the reverse! That section of my financial lexicon is going to have no shortage of entries.
Today’s data – Industrial Orders
We start by thinking at least it is not getting any worse.
"In March 2012 the seasonally adjusted turnover index had a null variation with respect to the previous month (-0.7% in domestic market and +1.3% in non-domestic market)."
But then we get a weaker perspective:
"With respect to the same month of the previous year the calendar adjusted industrial turnover index decreased by 3.1% (calendar working days being 22, as March 2011)."
So we see that the last year has been a grim one although we see that if we look at the seasonally adjusted underlying index it is at 109 where 2005=100 so Italy had previously managed some growth.
As to new orders they are reported as rising by 3.5% on a seasonally adjusted basis which seems hopeful until we see this:
"In March 2012 the unadjusted industrial new orders index decreased by 14.3 per cent with respect to the same month of the previous year."
Hang on a minute!
The official March figures of rising industrial orders clash with the purchasing managers survey for April which reported this:
"Operating conditions facing Italian manufacturers deteriorated sharply in April, as new orders received in the sector contracted at the fastest rate