Only on Friday I took a look at Spain’s situation and compared the situation in her apparently healthy financial markets with the obviously unhealthy real economy. Today I wish to take a look to the East of her and examine the state of play in Italy where there are similarities but also many important differences. It is a feature of the Euro area crisis ignored by the mainstream media that the countries in trouble are there for a variety of reasons.
Italy and her financial markets
Government Bonds
First we note that Italy has a ten-year government bond yield which at 4.18% as I type this is a fair bit lower than Spain’s. We also see that in 2012 it fell heavily as it started the year at 6.6% and is now nearly 2.5% lower. However to be more specific it first fell then returned to to 6.6% area in late July and then fell. So she finds itself in a much stronger situation now.
If we move to shorter dated bond yields we now see something that looks positively healthy on a first look. As the two-year yield is now 1.41% which is down on the just over 4% of the opening of 2012 and considerably down on the over 5% peak of late July 2012. Unfortunately we have to remind ourselves that such apparent health is being bolstered by the Outright Monetary Transactions promises of the European Central Bank.
Stock Market
The Italian stock market has joined in the surge that has accompanied the start of 2013 as it is up some 8.3% already in 2013 if we use the FTSE:MIB index as our measure. It is now at 17,633 up considerably (16%) on the 15,200 or so with which it greeted 2012. Indeed investors who were brave enough to invest in the latter part of July should be smiling right now as around 40% has been gained in a powerful surge since then.
So if we review Italy’s financial markets we see that her position as measured by them has improved considerably since the beginning of 2012 which contrasts with the situation in Spain where they have run a cycle and followed the advice of Elvis
Return to sender
For Italy I would add a note of caution if you feel that the numbers above remind you of a Supertramp album.
Crisis what crisis?
A lot of intervention some actual and some promised has gone into those numbers!
The Euro itself
Movements in this tend to escape the news headlines when it is rising or to be more specific move to the politics section where various Euro area leaders can be found boasting about it! However the Euro rally has move on even since Friday as it is now at 1.337 versus the US Dollar and at one point earlier today rose briefly to 120 Yen against the Japanese currency which is currently proving the never try to catch a falling piano dictum! The Euro has risen to 1.206 versus the UK pound too.
However if we move from political fantasies to reality this must be making life even harder for Euro area exporters such as in Italy. After all many of these countries are on programmes which as supposed to make them more economically competitive via what has become called by its (shrinking band of) supporters internal devaluation. What we actually see is economic weakness which in some places is now a collapse in return for some relatively minor competitiveness gains that are now being offset by currency strength. Sometimes you really couldn’t make it up!
What about the real economy?
If we go back to November 19th of last year I pointed out this.
In the third quarter of 2012 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.2 per cent with respect to the second quarter of 2012 and by 2.4 per cent in comparison with the third quarter of 2011.
So weak but some pointed out that as it was better than the second quarter there could be a turn. How is that going?
Industrial Production
This morning Italy’s statistics office has told us this.
In November 2012 the industrial production index seasonally adjusted decreased by 1.0% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was -1.7%.
So still falling albeit at a slightly lower rate. But in my opinion we also need to look further back for a proper perspective on the situation.
The calendar adjusted industrial production index decreased by 7.6% compared with November 2011
This rate has in fact increased on the average for the year up to then which is 6.6%. We can also peruse the underlying index to gain some further insight we see that it at 80.8 compared to 2005′s base of 100 shows the depth of the problem. I looked back to what the number was when I discussed Italy on the 19th of November last year and the reading then (for September) was 83.0.
So industrial production in Italy continues to weaken and if we look at the rise in the Euro we are faced with the prospect of future export levels coming under financial pressure.
House prices are falling too
Some of Italy’s Euro area colleagues have had booms followed by a bust in this area. She has had a calmer pattern but we are now seeing some weakness there too.
the House Price Index (see Italian IPAB) decreased by 1,1% compared to the previous quarter and by 3,2% in comparison to the same quarter of the previous year
The actual index is at 98 but as the base is 2010 we learn less than we might from it but I intend to keep an eye on it as it looks as though we saw a turn downwards in the autumn of 2011. Why does this matter? It will impact on the construction sector and the banks. We find ourselves returning to my dichotomy theme as these are of course the same banks which are seeing their share prices surge right now. For example Unicredit which I described on the Jeff Randall Show as being like a member of the undead (kept alive on life support..) has a share price up 48% on a year ago. Remind me again, what do falling house prices and weak economies do to banks loan books?
Looking forwards
Whilst many look at unemployment numbers I feel that there is more insight to be gained from employment numbers. Firstly you have more influence on them and they also have become a useful guide to what happens next in the credit crunch era. If we look at November in Italy we see that employment fell by 42,000 which meant that it was 37,000 ower than a year before.
If we move to the business surveys we see more bad news. Italy’s service sector did this in December according to Markit.
Output across Italy’s service sector continued to decrease at a relatively marked pace in December, which data suggested was in part due to a loss of new work.
Somewhat ominously we also saw this.
Employment levels were cut again
Tucked away in the report was a very grim message and the emphasis is mine.
Confidence was down slightly since November, and close to the lowest seen since the start of data collection
Comment
As we examine Italy’s economic position we see that it shares with Spain an improvement in the apparent regard for her by financial markets. Indeed we see that Italy has strengthened by more than Spain in this regard. However as we move to her actual economic situation we see that problems are building for her. It is quite plain that her economy is shrinking and that there is no end immediately in sight to this.
The Italian problem of a high national debt is also now one of a high and rising national debt. The economic weakness has meant that she is running fiscal deficits -for newer readers Italy has had her fiscal deficit under better control than many- and her national debt is now 2.021 trillion Euro as of November. We also know that her national debt to economic output level is around 128% as opposed to the IMF/troika threshold which is supposedly 120%. Ooops! We also know that this is going to get worse. For example she had paid 23 billion Euros into the various Euro area rescue programmes in 2012 up to then and more will be needed in an example of my unstable lifeboat theme.
So Italy is now between a rock (her large national debt) and a hard place (her shrinking economy) and it is hard to see a way out. However she does have strengths as her private-sector has savings and there is the possibility of also deploying some of her black market economy to help. Some progress has been made as tax revenue is up 3.1% in the year to November but she needs more. Otherwise financial markets will lurch from complacency to crisis one more time.
