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
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?