Of depression style economics and falling prices in Italy

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.



This entry was posted in Bank of England, Euro zone Crisis, General Economics, Inflation, Quantitative Easing and Extraordinary Monetary Measures and tagged , , , , . Bookmark the permalink.
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  • Max

    I’m amazed how the Euro crisis seems to have disappeared from all our newspapers. Or is it just that everyone is so bored of it?
    Stock markets seem to take any minor absence of bad news as a sign to rise ever higher.

  • http://fabadger.blogspot.com/ Dan Hill

    On hiatus until the German government is settled then back to business.

  • Robert S


    I thought the troika didn’t want Greece’s debts to go over the 120% limit, so why is it okay for Italy’s to stand at 130% and for no haircut to be applied? Hmmm. One rule for one and one rule for another?

  • Justathought

    Hi Shaun,

    While I am neither an advocate for fascism and democracy, in the view of the latest events, I wonder how come in Greece an elected party could be charge and going to trial under the pretext of “criminal organisation” while the actual and precedent parties in power, notoriously many of the participants enriched themselves, have a free walk without any impunities.???

    How comes in Italy “a should be” retired man, by societal standard, can not only have such “power” but enjoy a personal vendetta???

    Well sarcastically I am in the position to enjoy the show at the first loge but most of the population while maybe smiling now may have a rude awakening… If I believe this info: “Italian bank holdings of Italian debt:
    €400 billion, an all-time high.” …”Bails in”, anyone?

  • realfinney

    These things are hard to keep track of, but Greek debt-to-gdp is currently about 170%, after it’s rescue. The current plan (woefully on t’rack) is for it to decline to 120% by the end of the decade. I seem to remember a press conference where the hacks all burst out laughing when this plan was announced.

  • forbin

    Ah Shaun,

    This is where the crafty British out foxed the Italians again

    Daft Italians thought you really had to have Austerity !

    We talked and then went down the other route !

    The result is that our “Austerity” is working and theirs does not – all aided and abetted by having your own currency ofcourse ….

    And our very own money making machine = QE , which apparently has escaped its “steralization ” again today !

    muzak – M.A.R.S. – Pump Up The Volume ( QE ) !

    tisk ! tisk! , I’d have thought the Italians would have learnt from the last War, follow us , not the Germans!! ;-)


  • forbin

    The Stock Markets always require change

    up or down , doesn’t matter so long as its changing , nickel and dimeing each transaction is how they create that “value” ! Hah! and they though the Tobin tax was a bad idea?

    Sparrow farts in Chancellors garden – Phosphate futures drop!!

    Yah , Governments muscling in on their patch ! Gerroff !! this is our pot o’ Gold!!

    Newspapers have the memory attention span of a Mayfly . They sell copy – read up on Mark Twain about it ;-) Don’t let the side show distract you from the main attraction ……..


    PS : “Euro crisis seems to have disappeared” – Muzak link

    Record of Unending Silence – by Monty Python

  • forbin

    hehe – and the Goldbugs think they’ll be keeping their gold ?

    GOP – Whats mine is mine and whats yours is mine !


  • Anonymous

    Great column, Shaun. Regarding final domestic demand, Istat doesn’t report on that in their English release. I tried to read the Italian. Does “Domanda nazionale al netto delle scorte” signify final domestic demand? If so, even the Italian version doesn’t seem to give the four-quarter percentage change for this aggregate. I tried calculating the product of the quarterly changes provided in the table, and came up with -3.1%, which looks about right, and is 1.0 percentage points more of a decline than is registered for GDP. One does wonder why Istat wouldn’t just show the four-quarter change in final domestic demand in their English-language release, along with GDP.

  • Walt Kowalski

    Vive il Duce !!! What could be more theatrical than a convicted criminal and massive egomaniac using what power he has to bring down the government and force elections ? It’s not about economics, nor elections, nor power. It’s all about him. All and always il Duce.

    ZH is now running an update: “UPDATE: Reuters reports that 20 senators from Berlusconi’s party are preparing to create new party if Berlusconi does not soften stance against PM Letta – EUR and Italian Bonds are ramping”

    Drama drama drama. While theatrical, this is no way to run a country. Anyone who is holding the ITL 10yr is quite brave I dare say.

  • Rods

    Hi Shaun,

    It sounds like Italy is being Italy, which since WWII has had multi-party coalitions and been pretty ungovernable.

    The Eurozone is still a smouldering wreck, which will burst back into flames at some point due to all of the tensions within the system.

    And all the while the EU is demanding that all the Eurozone countries get their budget deficits under 3%, they are leading the way and setting a good example with a second cash call where their budget deficit for this financial year will be 8%!

  • Anonymous

    Hi Shaun

    Yes Berlusconi makes Italy unmanagable, also remember that Berlusconi has a veto on EU proceedings – this may help to explain why the EU is disfunctional and headed for a shipwreck

  • Justathought

    Hi forbin,

    “hehe – and the Goldbugs think they’ll be keeping their gold ?”

    Maybe one mistake and we’ll have all to relocate… With 14000 times more radiation than Hiroshima our present concerns will seems extraordinary “futile” , don’t you think?


  • Noo 2 Economics

    One bright spot is that I expect Italy GDP to start turning around about now, although that will mean it shrinks more slowly but, if technicals hold it should turn to growth, of a sort, in the second quarter next year.

  • Midge

    Hi Shaun After Friday’s blog I bet you had a wry smile when you heard the government is bringing forward it’s new Help To Buy scheme beginning next Monday.

  • Anonymous

    Hi Robert S

    That particular target always was a hostage to fortune as it was designed in essence to avoid catching other countries in the net and has ended up catching Portugal (124% and rising) and Italy! At the time it looked as though Italy had at least some control on its public finances and I think that some in authority may have been silly enough to believe their own hype about the timescale for Greece.

    As an aside some of the official forecasts are an utter fantasy. Portugal’s national debt was supposed to peak in 2012 when she was projecting deficits forwards even under their own scenarios.

  • Anonymous

    Hi Justathought

    I had seen that number and you reminding me made me check it. According to the Bank of Italy some 426 billion Euros of Italian government debt was held by its banking sector (strictly: Monetary Financial Institutions). Actually the increase in bank holdings is pretty much the same as the increase in the debt over since August 2011.

    A type of round-tripping #QE anyone?

  • Anonymous

    Evening Forbin

    In austerity terms is it the UK coalition government who are the ace can-kickers? As I have the football on the radio (Everton v Newcastle) I guess they have kicked the can as hard as a Leighton Baines free kick!

    Eliminating the fiscal deficit seems to have been kicked from the end of this parliament to the end of the next…..

  • Anonymous

    Hi Andrew and thank you.

    I am afraid my Italian is not so good to be certain either. However indicator after indicator records weak domestic demand in Italy…..

  • Anonymous

    Hi Mr K

    It is very like a Shakespearian tragedy isn’t it? However so far the staying power of Signor Berlusconi has been extraordinary and perhaps the only bit which is admirable!

    This morning Italian government bonds were for the brave but there was a decent reward at the end of the day as they recovered much of the lost ground. But it is a market to bank your profits and move on I agree….

  • Anonymous

    Hi Rods

    Back to do as I say rather than do as I do for the Eurocrats? They do have a cheek when they criticise corruption as I think it is now 19 years since they have had a proper set of audited accounts.

  • Anonymous

    Hi Noo2

    Actually the surprise has been that some of these countries have not turned round before. It has been quite an anti-achievement by Euro area austerity to manage it as economies usually have self-correcting mechanisms that come into play.

    The sword of damocles is what they do next about austerity…

  • Anonymous

    Hi Midge

    Yes I did although I also had a sense of foreboding for the UK economy and the consequences of all this!

    It was not good however for the UK media overall which in essence presented a copy and pasted version of the Chancellor’s announcement as news on Friday. So as soon as Sunday the news that prudence had become recklessness must have come as a shock to all who do not consider themselves as 24/7 news aggregators!

    No wonder the CEO of the Guardian fears for the future…

  • Mac

    “Is it just me or are governments looking ever weaker and more incompetent across a broad brush stroke of countries?”

    No not just you Shaun.