Yesterday saw something of a reversal in Italian financial markets. Her government bonds fell with her benchmark ten-year yield rising from 4.33% to 4.47% and the FTSE-MIB equity index fell by 3.5% to 16,706. Even the previously super strong Euro which of course Italy shares with her partners in the project dipped to below US $1.35 and allowed the pound to recover back into the 1.16s. One likely cause of this was the fact that the man responsible for the “Berlusconi effect” on Italian financial markets appears possibly able to live up to the Terminator’s “I’ll be back” claim or perhaps given his age Lazarus might be a better . But it is also true that the Italian economy has not lived up to the billing provided by the rise in her bond and equity markets since the late summer of 2012. Whilst the appointment of the Italian Mario Draghi to the Presidency of the European Central Bank led to monetary promises (Outright Monetary Transactions) which boosted financial markets so far economic reality has only seen a decline.
In modern economies -or perhaps I should say what we thought were modern economies- the services sector is by far the largest component. Accordingly the survey numbers from Markit below make grim reading for Italy.
January saw Italy’s service sector output contract at a faster rate, – falling from December’s post of 45.6 to 43.9 in the first survey period of the year.
So we see that on a number bench marked for no change at 50 Italy was already seeing a substantial decline which has now deepened. So worries about the end of 2012 have built further for the beginning of 2013. As we digest this we see that it has also come with a very unpleasant addition. The emphasis is mine.
Reflecting the sustained (and accelerated) decrease in business activity, Italian service providers continued to slash staff numbers during January. Moreover, the decline in employment over the month was the most marked since data collection commenced over 15 years ago.
This brings me to the labour market figures released on Friday.
Istat estimates that 22.7 million persons were employed in December 2012 (provisional data). Employment rate was 56.4%, unemployment rate 11.2% and inactivity rate 36.4%.
We see from those numbers that employment in Italy had fallen by 104,000 in December which in itself represented quite an acceleration in the 278,000 fall for the year as a whole. We face the prospect of further falls in Italian employment in January and we also know that in the credit crunch era employment changes have been a good signal for what is likely to happen next.
Strangely given the numbers above unemployment only rose by 4,000 in December but with the unemployment rate already being 11.2% then the falls in employment being documented will push it higher into something of a danger zone as 2013 starts.
What about manufacturing?
There may be a slight sigh of relief at the numbers below being better than the services ones.
The downturn in Italian manufacturing continued to ease at the start of 2013, as signalled by a rise to 47.8 in January, up from December’s mark of 46.7.
So better but we note than even so Italian manufacturing contracted in January and it has been contracting since October 2011. Also in spite of trying its best to exude optimism the report told us something that is getting familiar.
Italian manufacturers cut staffing numbers at a solid and slightly accelerated rate during January. That extended the ongoing spell of net job losses in the sector to a year-and-a-half.
So we see yet more cuts in employment. We also see that retail sales and domestic demand take some of the blame here.
A key element in this weakness remains falling consumer spending
Of course falling employment and domestic demand tend to come hand in glove and neither will be helped by further applications of Euro area style austerity. Unfortunately that is set to happen.
We know that they have been falling in Italy and fell at an annualised rate of 3.1% in November. However many of her neighbours have already produced numbers for December too and the outlook for Italain exports to them does not look bright on the basis of them.
In December 2012 compared with November 2012, the volume of retail trade fell by 0.8% in the euro area and by 0.6% in the EU27……….In December 2012 , compared with December 2011, the retail sales index dropped by 3.4% in the euro area and by 2.0% in the EU27
There is nothing in there that looks optimistic and oh how Eurocrats must hate having to look at numbers showing that rather than growth it is in fact doing worse than its near neighbours who are outside it!
Does consumer confidence help?
In January the confidence climate index decreased from 85.7 to 84.6.The decrease was notably explained by personal and future climate that cut from 90.7 to 89.3 and from 78.0 to 77.1.
This number has been weakening lately and if we compare 84.6 to the benchmark of 2005 representing 100 we see it was already giving a poor reading. Interestingly the number for assessing Italy’s economic situation is -135! However we do not get any more detail than that.
What about wages?
We do have figures for contractual agreements in Italy which represent around 70% of the labour market.
Compared with December 2011, the hourly wage index increased by 1.7 per cent while the per employee index increased by 1.6 per cent.
So they are rising but we know that real wages are if anything more important so let us also use today’s inflation numbers.
In January 2013, the Italian harmonized index of consumer prices (HICP) rose by 2.4% with respect to January 2012
So different time periods but a familiar fall in real wages albeit a smaller one than in some countries.
Also if we look back we have an interesting addition to the capital/labour debate. Both the numbers above are based in 2005. If I tell you that the wages index is 118.2 and the inflation one at 116.9 we see that over the past 7/8 years there has been barely any growth and if we look at prospects we have to face the possibility and even probability of it going negative.
We see from the data that it is the labour market which is flashing amber and maybe even red for Italy’s economic prospects in 2013. The business survey numbers are already hinting at a weak first quarter for economic output but of course we have February and March to come. But for me we see very weak employment trends which were in existence at the end of 2012 but have got worse and these are a signal for the first half of 2013 and maybe beyond. If we add in weak wage growth we see that the labour market is a contractionary influence and as we recall how useful a prescient indicator it can be the concerns build.
Other factors could help Italy as in exports or a falling oil price but we also know that the former will have been hindered by the strong Euro and the latter has in fact risen in recent times. So we are in danger of a by now sadly familiar downwards spiral as Euro area austerity deepens a downturn into a slump. In such a case the theme of my January the 14th update her large national debt, will be an increasing concern. On such a road a debt haircut or default is by no means inconceivable.