The best hope for Italy’s economy now is the example of Belgium

The last 24 hours has been one of extraordinary turmoil in financial markets. Just as the media in the UK was revving up to record the equivalent of biblical plagues of locusts for the UK pound and government bond market a certain Silvio Berlusconi put the skids under the Euro. Just like the Terminator it feels like he is almost indestructible and will always be back. This however coincided with events on the far side of the globe and set the Japanese Yen off on an extraordinary rally. Having fallen earlier to 94.66 Yen versus the US dollar it blasted upwards in only a few hours to 90.7 Yen. Indeed against the newly Berlusconi’d Euro the 125 Yen it required to purchase a Euro suddenly dropped to only 119! So we saw a move which might be considered substantial over a month take place in a few hours and much of it has lasted as 92 Yen buy a US dollar as I type this. So whilst stop loss orders probably exacerbated and fed the move it looks as though there was more to it although it is still early to say.

Italy becalmed politicly

Whilst politics is not my patrol it is clear that at best Italy is going to struggle to form a government after the result from her election. It is also clear that the guardians of the Euro which apparently includes the BBC the way it covered this on BBC Four News last night are alarmed by the consequences of Silvio Berlusconi’s surge. As we muse the prospect of Italy being asked to vote again until she gets the “correct” result perhaps we should recall that Belgium actually did extremely well when she did not have a government a fact which seems to have been forgotten in the melee. Although of course there was no Silvio factor at play there!

Financial Markets

The Silvio surge exploded like a bomb on Italy’s financial markets. The prospect of the centre-left pro Euro coalition winning saw her government bonds surge and the ten-year yield dropped to 4.2%. However as the initial polls proved inaccurate which happens frequently in Italy they dropped like a stone and the yield rose back towards 4.5% or pretty much where it had started. Today they have dropped again heavily and the yield is 4.75%.

So you might say meet the new Silvio same as the old Silvio in his effect on markets. This is backed up by the Italian equity market where at the peak yesterday it reached 16,884 on the FTSE:MIB index whereas now it is 15,714 or 7% lower. As you can see things are very volatile to say the least!

The reach of the Berlusconi effect was certainly strong enough to hit the Euro too as for example the pound sterling rose to 1.16 for a 2% rise. Against the US Dollar it dropped from 1.33 to 1.307 now and I have already explained the wild plummet against the Japanese Yen.

So in short if you recall my post of the 4th of February on safe havens we have over the past 24 hours been given a practical test in them by Silvio Berlusconi. So Yen rally check,Swiss Franc rally check, and as I will discuss in a bit a UK Gilt rally too so check. You will not be surprised to read that German government bonds have rallied strongly too.

Where does this leave the Italian economy?

In the background we have the issue that Italy has had a poor economic growth performance all this century and ironically if you like since it joined the Euro. This has left it with a high level of public-sector debt (127.3% of economic output) which means that it is vulnerable on this score in any future economic slowdown which is of course what it is now experiencing. I reviewed it thus only last week.

we know that another turn of the Euro area austerity screw is planned for 2013. So far applying that to a weakening economy has invariably given it another push downwards.

So not only is she weak -the latest economic growth data showed her economy had shrunk by 2.7% in the previous year- but this looks likely to persist. I did also point this out.

Her ten year bond yield is at 4.4% just over 1% lower than a year ago so the divorce between financial markets and the real economy goes on. At some point this year markets will get along to worrying about the public-sector debt burden but apparently not now!

It would appear that they are starting to get worried.

What is happening in her economy now?

Since my update last week there has been further data enlightening us on the Italian economy.

Industrial Orders

These were the economic equivalent of a video nasty.

With respect to the same month of the previous year the calendar adjusted industrial turnover index decreased by 6.3 (calendar working days being 19, one less than in December 2011).

In December 2012 the unadjusted industrial new orders index decreased by 15.3 per cent with respect to the same month of the previous year.

Construction output was grim too.

The calendar adjusted index of production in construction sector decreased by 15.4% compared with December 2011

So we go forwards with production and construction producing depression era rather than recession type numbers.

Retail Sales

There is a brief flicker of hope as we see seasonally adjusted retail sales rising by 0.2% in December compared to November but as we look back we see this.

The unadjusted index decreased by 3.8% with respect to December 2011

Also the underlying index is only at 96.1% of the level in 2005 and even this performance is dependent on food sales remaining steady as without them it drops to 93.8%.

Consumer Confidence

In February, the confidence climate index increased from 84.7 to 86.0.

However even this improvement is a signal that things are getting worse more slowly than an outright improvement as on this measure 2005=100. The assessment on Italy’s current economic situation was -142 which speaks for itself I think.

Internal Tourism

Sometimes these types of left field economic measures can be quite revealing. So I will let the numbers for Italian business trips and holidays speak for themselves.

Compared to 2011, there is a 5.7% decrease in the number of trips, while nights spent travelling remain stable.

Trips within Italy itself look to have fallen at a faster rate of 8.3%.

Trade Figures

This is a more hopeful area for Italy as she has turned a deficit into a surplus in 2012 and she looks as though she continues to do well albeit monthly figures are unreliable.

Compared to the same month a year earlier, in January 2013 exports show a large increase (+17.7%), compared to a significant decrease in imports (-5.6%).

We have a case here of what was called Good Goran,Bad Goran at the Wimbledon tennis some years back. The good part is easy as the export performance is clearly that particularly if we factor in the Euro strength. The bad is the fall in imports as it has three interrelated effects.

1. It flatters the trade numbers

2. It also flatters the economic growth numbers as imports are a subtraction from it.

3. It gives us further insight into the weakness of domestic demand.

Also please remember this if you hear talk of the International Monetary Fund or IMF getting involved in Italy as under its old legitimate regime it helped with trade problems. As Italy does not have one then the IMF is not required.


So as I pointed out last Wednesday the Italian economy is between a recession and a depression right now. Only her good trade performance is keeping her away from the latter right now. So there are dangers in her political interregnum.

However considering how weakly and badly she has been governed perhaps no government is the best option of all after all it worked for Belgium!

The UK and the Gilt market

I guess there is plenty of humble pie eating by those who only last weekend forecast a collapsing Gilt market and pound exchange rate after the UK’s AAA downgrade by Moodys. Instead the Gilt markets has surged and our ten-year Gilt yield is on the edge of pushing below the 2% yield barrier again.

What do we learn from this? Well for starters that the Berlusconi bounce is a much more powerful influence than a mere ratings agency! Whilst both may be discredited one seems to be able to plough on regardless.

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