I’ve been on a break from the blog and the world for the last week. Something that did however catch my eye was the latest reports from Italy:
Istat and the Bank of Italy gave more evidence of how hard the recession is hitting the Italian economy on Monday with reports highlighting big drops in industrial production and business confidence.
Istat said production fell 7.6% in November compared to the same month in 2011 and 1% with respect to October. The national statistics agency said the seasonally adjusted figure was the 15th consecutive year-on-year drop in industrial output.
It added that production was down 6.6% in the first 11 months of 2012 compared to the same period in 2011. The central bank said business confidence continued to be low, with the number of firms reporting an improvement at the end of 2012 3.8%, half that in September. Some 57.5% said sentiment was down compared to 50.6% in September.
The bank of Italy has more:
The Bank of Italy slashed its forecast for the country’s shrinking economy on Friday, as tight credit conditions and a gloomy international backdrop darken the domestic outlook ahead of national elections in February.
The central bank said it now expects gross domestic product to slump by 1.0 percent this year rather than the 0.2 percent contraction it forecast in July.
In a quarterly economic report that highlighted the economic challenges that will face Italy’s next government, the bank said the recession that started in the third quarter of 2011 would extend well into 2013.
It forecast only a modest and uncertain revival in the second half of this year and growth of just 0.7 percent in 2014, adding that the economy probably contracted by 2.1 percent in 2012.
And much like the latest PMI the trade data, certainly supports the premise of weaker internal demand.
Trade surplus in Italy increased less than analysts estimated in November, as exports recorded only a slight rise, while imports declined, the Italian National Institute of Statistics (Istat) reported on Wednesday.
The Italian trade balance recorded a surplus of €2.363 billion in November, compared with €2.42 billion, revised from €2.45 billion, recorded in October on a non seasonal basis. Analysts estimated the surplus would stand at €2.66 billion.
As I explained back in December, Italy has always been the big one for me quite simply because combined with Spain it creates a problem in excess of what the rest of Europe could credibly manage. The latest banking data from Spain shows that the economy continues to deteriorate leaving Italy to hold up the deal.
Although a surplus in the balance of trade could be seen as a positive it appears to be driven by a rapid slowdown in the local economy with the bank of Italy reporting that fuel and diesel demand are down by 14% and 12% respectively from a year ago. The bank, like many other official organisations across Europe, is predicting a bottoming at the end of this year but this is based on a gradual recovery in investment, a pick-up in demand in the euro area and improvements in economic confidence.
That’s obviously possible but still seems like a big ask in my opinion especially due to the fact that, much like in other struggling Euro nations, the failing economy is leading to demands for further fiscal tightening:
Italy may need at least 9 billion euros ($12 billion) in additional budget measures in 2013 to meet its deficit targets as the worsening recession hurts tax revenue and fuels unemployment costs, a Finance Ministry official said.
Italy will need to find 8 billion euros to finance jobless schemes and faces a 6 billion-euro revenue shortfall from value- added and gambling taxes, Finance Undersecretary Gianfranco Polillo said in an interview in Rome. That will be partly offset by a bigger-than-expected take from a new property tax and falling debt financing costs that will add 5 billion euros in resources.
With a slowing economy, the idea that taxing the private sector more appears to be the same mistake that has been made in other nations, but Italy does have differences in this regard. If you look at the chart below you will see that Italy has a huge advantage in terms of private sector debt which could potentially provide a source of wealth transference to the government sector. This is then obviously an issue of political leadership which is why the upcoming election is so important and the outcome has the potential to make or break the Eurozone.
As an aside the chart also shows why I am quite concerned about the on-going slowdown in The Netherlands.
Full bulletin from the Bank of Italy below.