One of the features of Italian political life and indeed government is the periodic appearances of Signor Silvio Berlusconi. One of these took place on Saturday evening as he instructed those government ministers who are in his PDL party to resign from government. This means that a vote of confidence is likely on Wednesday as Prime Minister Letta struggles to remain in power. It would appear that neither age, convictions for fraud or a possible prison sentence and expulsion from parliament make any impact on Signor Berlusconi.
Impact on financial markets
As we wonder whether these regular political crises make Italy ungovernable there is no doubt that they create volatility in its financial markets. This is of the downward variety in its stock market as the FTSEMIB has fallen by 2% this morning to 17,300. There is a slight irony in the fact that one of the heaviest fallers (3.5%) has been Berlusconi’s media company Mediaset. On the other side of the coin volatility of the upwards variety is the usual response from the Italian bond market. Today the benchmark Italian ten-year bond yield is up around 0.2% at 4.6% having been above 4.9% first thing. As has already been pointed out to me on twitter today Signor Berlusconi does act like viagara on Italian bond yields. Although the effect is by no means at the level reached (7%) in the autumn of 2011 for which Italians can probably thank the European Central Bank and its so far mythical Outright Monetary Transactions. Indeed Italian financial markets are likely to have this view of Signor Berlusconi via the Artic Monkeys.
incapable of making alright decisions,
and having bad ideas.
Also the impact is being felt elsewhere as bond yields have edged higher in the other peripheral Euro nations today and the Euro has dipped. Or at least it was dipping until markets also started to worry about the other current political and government crisis the possible US debt limit shut-down! Is it just me or are governments looking ever weaker and more incompetent across a broad brush stroke of countries?
What about the economy?
Since I examined the position on the 8th of September there has been more bad news.
In the second quarter of 2013 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.3 per cent with respect to the first quarter of 2013 and by 2.1 per cent in comparison with the second quarter of 2012.
This was a downwards revision to the originally reported -0.2% and in such a situation every little doesn’t help. Also if we look into the pattern we see something very familiar in the Euro crisis which goes good, good and then BAD (apologies for the deliberate capitals). This is because exports are up and this leads to a good impact on measured economic output or GDP. The BAD comes from the fact that imports falling at an annual rate of 4.6% dwarf the 0.2% increase in exports and lead to a much larger positive impact on GDP as net trade is the measure here. So a sign of depression-like conditions in domestic demand lead to an increase in recorded GDP? Yes and we have seen this more than a few times now where up is indeed the new down.
Inflation or rather disinflation
There is another warning sign flashing too and this has seen more developments today. First let us look at the overall situation in the Euro area.
Euro area annual inflation is expected to be 1.1% in September 2013, down from 1.3% in August
Economics text books would have expected this long ago as has been discussed on here often. But falling inflation and actual disinflation (negative inflation) has been on the horizon for a while now in 2013 for some Euro area economies. At the beginning of the price chain in Italy (industrial producer prices) we are now seeing this.
The percentage change of the average of the last three months compared to the previous three months has no variation (no variation on domestic market and -0.1% on non-domestic market).
The index decreased by 2.0% compared with July 2012 (-2.3% on domestic market and -0.8% on non-domestic market).
Only on Friday we received the equivalent data for the services sector which is not as up to date as it only reaches the end of the second quarter of but too showed a year on year fall (0.5%).
Consumer Price Index
Such events seem to be already affecting consumer inflation.
In September 2013, according to provisional estimates, the Italian consumer price index for the whole nation (NIC) decreased by 0.3% compared with the previous month and rose by 0.9% with respect to September 2012
Such a development is likely to be welcomed by the hard pressed Italian consumer as price increases thin out and the possibility of being able to buy products more cheaply appears. Although of course the reason for it is much less welcome!
Italian national debt
As this continues its steady march upwards and passes 130% of economic output there are two further toxic elements for it. First is the continuing fall in economic output and the second is the fall in inflation levels as a government pays its debts in nominal rather than real Euros. So disinflation would not be welcome in this respect and would pose quite a challenge if combined with continuing falls in economic output.
As ever politicians have a different view as apparently a national debt of 2.073 trillion Euros and rising means this to Deputy Finance Minister Fassina.
Italy fiscal position (is) under control
Perhaps we should file this alongside last week’s words from Prime Minister Letta.
I’m optimistic about political stability
Balancing the books?
The by now familiar effects of Euro area austerity are out in full force in Italy where the economic decline has meant that it is ever harder to hit public budget targets. The solution is invariably to raise indirect taxes where the choices were to raise VAT from 21 to 22% or to raise fuel duty by around a couple of Euro cents. Of course this was only likely to spin the Italian economy around in ever decreasing circles.
However whilst this may be an attempt at a solution for public budgets, it will raise prices and hence delay what appears to be a welcome development for private budgets. Falling inflation is bad for public debts and somewhat toxic if prices actually fall but private budgets will treat it will relief. So we see one more time a conflict between the individual and the state’s welfare.
Ironically confidence was supposed to be improving
From Italian statistics this morning.
In September 2013 the composite business confidence climate index, obtained by summarizing the confidence climates of manufacturing, construction, market services and retail trade, increased to 83.3 from 82.0 in August.
So this was looking hopeful although to put it in context the benchmark of 2005 of 100 looks a long way away. But we have a problem which is that whilst surveys may improve the actual data has not, so far at least.
In July 2013 the unadjusted industrial new orders index decreased by -2.2 per cent with respect to the same month of the previous year……With respect to the same month of the previous year the calendar adjusted industrial turnover index decreased by 3.6%
The calendar adjusted industrial production index decreased by 4.3 % compared with July 2012 (calendar working days in July 2013 being 23 versus 22 days in July 2012); in the period January-July 2013 the percentage change was -4.0 compared with the same period of 2012.
And bringing up the pack from the rear comes construction.
The calendar adjusted index of production in construction sector decreased by 10.8% compared with July 2012
This week seems some familiar developments such as a Berlusconi inspired political crisis and a continuing economic depression in Italy. However there is an unfamiliar development which is a the falling rate of consumer inflation which could move into negative territory. We do not know what will happen in other areas which influence this such as the oil price and other commodities as well as the exchange rate. But finally after a long lag the economics textbooks have found that reality can sometimes be a friend.
The catch is that the proposed response to the situation will initially benefit the Italian government at the expense of its citizens who will have to pay higher prices. So perhaps the current political turmoil is small fry compared with the issues building behind it as one more time we see the interests of governments and the political classes diverge from that of their citizens. This will happen in even stronger force if the austerity measures have their usual effect of weakening the economy further.
UK Quantitative Easing
This is today recycling some of the holdings which expired on Friday. Accordingly the Bank of England plans to buy some £640 million Gilts which mature between 2017 and 2020.