Euro area economic divergence spreads as Spain and Italy take different paths

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As we move into 2014 the theme for the economy of the Euro area is one the beginnings of an economic improvement. For example this morning’s overall composite purchasing managers report (PMI) is showing moderate expansion as November’s 51.7 rises to 52.1 in December. Hardly a surge but an improvement on the darker days of 2012 and 2013. However rather than the economic convergence promised by the Euro area founders we are seeing divergence. I have discussed recently the widening gap between Germany and France but today I wish to cover another example of divergence which is that between Italy and Spain. Back in the days when the words Euro and crisis were more regularly hitting the news headlines the fear was that one of these larger economies would be the straw that broke the camel’s back. Now we face the fact that their performance is now quite different.


Today’s services PMI for Spain has a very optimistic sheen to it.

The recovery in the Spanish service sector strengthened in December as both new orders and business activity increased at sharper rates…….New business increased for the fifth successive month in December. Moreover, the rate of expansion quickened for the third consecutive month and was the fastest in almost six-and-a-half years.

The index rose from November’s 51.5 to a rather Germanic 54.2 in December. Actually the reading was in fact higher than that of Germany! The report was not problem free as some of the business increase was due to discoutning and employment fell again (but at a slower rate). But it recorded a considerable improvement and came on the back of this.

The Spanish manufacturing PMI signalled an improvement in operating conditions in the final month of 2013 as output and new orders rebounded from a fall in November.

This report was weaker but a rise from in 48.6 November to 50.8 in December showed not only an improvement but also the hope of some actual growth. Again the fly in the ointment was a continuing fall in employment but this also slowed.

So looking forwards there is genuine hope that the exporting achievements of the Spanish economy in 2013 may be followed by a more widespread effort in 2014. This reinforces the impression given by the retail sales numbers released in the holiday season.

The General Retail Trade Index annual change at constant prices stood at 2.0% in November, two points and a half higher than that registered in October.

So we see an actual improvement the like of which has been extremely rare in recent Spanish economic history. Indeed the retail sector has experienced something of a nuclear winter with the underlying index being 81.9% of 2010′s level. So perhaps we are seeing a stabilisation here with the hope of a recovery which will need more data to be confirmed.

Even the house price index is hinting at a possible turn in its woe.

The annual rate of the Housing Price Index (HPI) in the third quarter of 2013 increased (they mean improved) more than four points, standing at –7.9%. This is the highest rate since the third quarter 2011.

The index improved on a quarterly basis by 0.7% which may not be much but it does replace a series of substantial falls. Again care is needed as the index itself at 64.7 compares to a value of 100 for 2007.

Not everything is rosy in the Spanish economic garden as for example industrial new orders fell at an adjusted rate of 6.4% in October. But there is certainly growing hope for what has happened since then.


The situation here is quite different to that described for Spain. Here is today’s release for example.

December saw the level of business activity in Italy’s service sector contract for the second month in succession. Behind the downturn was a weakening of demand for services, which in turn contributed to further job losses and output price reductions across the sector.

The spot index at 47.9 was better than November’s 47.2 but remained in contraction territory. So if this PMI is any guide there are genuine fears that the Italian economy failed to register economic growth again in the last quarter of 2013 which would be the ninth in a row. Also worries about employment and unemployment in Italy will not be eased by this.

Furthermore, the net rate of job losses picked up fractionally since the previous survey period, reaching the fastest since August. The current sequence of decline in employment stretches back more than two-and-a-half years.

Against this the Italian manufacturing sector put in a muc better performance.

The upturn in Italy’s manufacturing sector continued into the final month of the year, with latest data showing further growth of output, new orders and employment.

The spot reading of 53.3 was the best performance since April 2011. So we have the larger services sector contracting and the smaller manufacturing sector doing well. This pattern was repeated by the official business survey which had manufacturing at 98.2 (2005=100) but services at only 80.6.

Consumer confidence alo fell from 98.2 in November to 96.2 in December with the section for personal circumstances falling from 101.1 to 97.3. This comes on top of an already weak series for retail sales as shown below.

In October 2013 the seasonally adjusted retail trade index decreased by 0.1% with respect to September 2013 (-0.2% for food goods and -0.1% for non food goods). The average of the last three months compared to the previous three months decreased by 0.4%.

The unadjusted index decreased by 1.6% with respect to October 2012.

So we are left with an image that the rising tide of economic improvement in the Euro area has not lifted Italy’s boat by much if at all. Although of course there is always a more optimistic official view as expressed by Prime Minister Letta before Christmas. From the Financial Times.

Italy had a bad accident. We have left the emergency room and the operating theatre and now we are in physiotherapy,” Mr Letta said. “Once out of physio we will return to ‎normality.”

Some shared experiences

Bank lending

This remains a problem across the Euro area as a whole with the European Central Bank reporting a 3.9% fall in lending to businesses in November which is getting worse rather than better. As I have pointed out before if they want an explanation for this they down not have to leave their Frankfurt tower as it is in their financial regulation section. Italy put up a particularly poor performance here with bank lending to businesses falling at an annual rate of 5.9%.


After a long spell of rises the Euro has recently headed lower. Whther this is a short-term retracement or a longer trend is still uncertain but both Italy and Spain will welcome this as it dips below 1.36 versus the US Dollar. The ECB will also welcome it as for once it would welcome a little inflationary pressure.

Government bond yields

These had already dropped substantially for both Italy and Spain but 2014 has seen further improvements. Both have seen their ten-year yields drop below 4% as the international search for (any) yield continues. As I have pointed out before it is no longer so inconceivable that they could return to not so long ago and have similar bond yields to that of the UK. Although Italian’s ongoing problems cast more of a shadow over any such prospect as sooner or later her national debt will worry markets.


The theme of today is illustrated by the tale of two different service sector business surveys where Spain’s 54.2 exceeds Italy’s 47.9 by 6.3 as we consider yet another type of economic divergence. Of course this is only one monthly measure but there have been a sequence of better numbers from Spain as discussed above which are not being produced in anything like the same numbers by Italy.

In another way this is symbolised by the banking sectors as Spain has just exited her aid programme from the European Stability Mechanism. Instead the banking news from Italy concerns ever more trouble at Monte Paschi de Siena. There remain plenty of problems for Spanish banks as loans continue to be cut and of course there is the 41.3 billion Euros borrowed from the ESM but who right now prefers Italy’s economic prospects to those of Spain?

This entry was posted in Euro zone Crisis, European Central Bank, General Economics, House Prices, Quantitative Easing and Extraordinary Monetary Measures and tagged , , , , . Bookmark the permalink.
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  • Pavlaki

    Do we believe the Spanish figures? All the economic indicators coming good at the same time? How independent of government influence is the Spanish statistics office? This, after all, is the government that is mired in the Barcenas scandal! Lets hope they are not reporting figures in the way the Greeks did!

  • Anonymous

    Hi Shaun
    How long can Italy survive in its present form and condition? The situation now concerning its public debt must be getting ever more unstable.
    It is nice to hear of better news from Spain though.

  • Rods

    Hi Shaun,

    Your fellow MM blogger Simon Ward has suggested that M1 money figures suggest that Spain will have a much better 2014 than 2013. As you always remind us 1 months PMI figures can be misleading, it does seem to confirm this.

    One area where Spain is very strong and there has been much price inflation over the last 12 months is food exports, so this must account for some of their export growth.

  • Anonymous

    Italy also seem less stable politically plus they have an opposition movement that is vehemently anti-banking. Should Italy experience further hardship the pre-existence of a cogent alternative could mean change develops faster.

  • Anonymous

    Hi Pavlaki

    As you know it is my view that we should take all statistics both official and otherwise with a pinch of salt and sometimes more. It is also true that bad news is considered particularly unpatriotic in Spain. However the PMIs are private-sector reports and have been reasonably reliable in the decline as a forecaster of GDP a 3/6 months later. If that relationship remains true then 2014 will see some growth but we remain a long way from knowing how much.

  • Anonymous

    Hi Rods

    If we factor in the narrow money figures as well then quite a few signs are looking optimistic for Spain in the early part of 2014. The main imponderable is the continued weakness in bank credit and broader monetary aggregates. So perhaps a broad/narrow money turf war is on its way…

    I would be interested in the food price numbers you have looked at as I do recall them being a factor in inflation. However the latest official data for exports is disinflationary.

    “The annual variation rate of the IPRIX stands at -2.9%, one tenth higher than in October”

    The food manufacturing industry sub-section was down by 0.5% in November and also according to INE some 0.7% lower than a year before.

  • Pavlaki

    You are right about bad news being unpatriotic. My Spanish contact tells me there is a real sense of having to keep quiet and he is very concerned about the so called ‘citizen protection laws ‘ that will come into force. This effectively will outlaw protest, criticism of political leaders and the police. I found it hard to believe, but there’s quite a bit about it on the internet. Incredulous for 21st century Europe.