29th April 2013 by The Harried House Hunter
The weekend just passed has seen a new government under Enrico Letta form in Italy as it tries to find some political stability in an economic crisis. As ever I will leave the politics alone except to point out that the new government looks to be a child of Italy’s political establishment when many electors cast their votes for anti-establishment candidates such as Beppe Grillo. So as seems so often familiar in these times we find ourselves mulling the concept of democracy and what it means in the twenty-first century.
What about Italy’s economy?
We know that the economic situation is weak with economic output in 2012 being some 2.4% lower than that in 2011 and some 6.9% below that of the near-term peak for the series in 2007. Putting this another way we see that Italy has retraced twelve years and returned to a similar economic output to the one she had in 2001. So we see that after growing slowly in what were relatively good years Italy has reversed sharply in the bad years of the credit crunch.
What is the outlook?
On Friday the ratings agency Moody’s offered this view on the outlook for Italy.
Moody’s has now lowered its forecast for Italy’s 2013 GDP growth to -1.8% from its previous forecast of -1.0%, and predicts growth of only 0.2% for 2014.
Displaying their usual skill at timing Moody’s used the “political paralysis” (which ended virtually immediately) as a partial reason for their maintenance of a negative watch on Italy and growth downgrade! However there were other factors including one which I discussed in relation to Spain only on Friday, the problem that smaller businesses are having finding funding from what look like ever more broken banking systems. From Moody’s.
Moreover, credit remains constrained and expensive, particularly for SMEs ( Small and Medium-sized Enterprises) which are Italy’s engine of growth. Indeed, close to one third of Italian firms cannot meet their operational expenses as they are short of liquidity, according to Confindustria, the Italian business federation.
That one-third figure is worrying enough on its own is it not? Let me add to that the view of the European Central Bank.
By contrast, SMEs in Greece, Spain, Italy and Portugal reported, in net terms, the largest decrease in turnover……..The reported decline in profits was most prevalent for SMEs in Greece (a net 77% of respondents), Spain (60%), Italy (58%) and Portugal (64%).
So we can see that this “engine of growth” as Moody’s puts it is struggling and misfiring. This means that as we see the leverage numbers below they look ever less likely to get bank finance.
By contrast, SMEs in Greece and especially Italy reported a net increase in their leverage (12% and 22% respectively)
Which no doubt led to a need for this.
SMEs in Italy contributed most to the net increase in the need for bank loans and bank overdrafts,
What about Italy’s banks?
This does not feature in the mainstream media much but here is Moodys view.
The second factor that supports the negative outlook is the country’s weak banking system.
Rather ironically there is a vicious circle at play here where past loans to businesses are increasing having issues with non-performance which make banks weaker and less likely to issue new corporate loans. Moody’s puts it thus.
Weakness in the banking system is additionally compounding to the weak economic outlook as the banking sector’s high cost of funds and capital is being passed on to its borrowers, particularly SMEs, in the form of higher lending rates.
If we look at a speech given by the Deputy Director General of the Bank of Italy in March we are reminded again today of the situation in Spain.
Tensions are now concentrated on loan quality: bad loans account for 6.9 per cent of total lending, while all deteriorated credit amounts to 12.8 per cent (3.3 per cent and 8.4 per cent, respectively, net of value adjustments).
So a reminder that troubled loans are not only a problem for Spanish banks although as her housing market is relatively untroubled Italy will have travelled to here by a different route. The same speech puts if thus.
Bank loans made up over two thirds of Italian firms’ financial debt, compared with about a third in France, Britain and the United States and half in Germany. Italy is the only major country in which this share has increased since the onset of the crisis.
So there you have it. Italian banks appear to have behaved as UK politicians would like UK banks to behave except it has created its own set of problems. Ouch! As we are reminded one more time to be careful what you wish for because what we in the UK wish for is described thus in Italy.
especially disadvantageous in the present cyclical phase.
Also care is needed with too rough and ready comparisons as Italy has a relatively small banking sector.
The Italian banking system is comparatively small with respect to the real economy. Its total assets amount to 2.7 times GDP, significantly less than in the other major countries except for the United States
However as the debacle which has enveloped the world’s oldest bank Monte dei Paschi di Siena has shown there are certainly plenty of problems to deal with in Italy’s banking sector. One of them is the way that official bodies like to emulate the supposed behaviour of an Ostrich when faced with a crisis as we review that words of the Governor of the Bank of Italy from January.
MPS IS A SOUND BANK
Right here,Right now
With apologies to FatBoy Slim we can look at the latest data from this morning to see how these themes are playing out in practice.
In April 2013 the composite business confidence climate index , decreased to 74.6 from 78.5 in March.
As the 74.6 compares to a benchmark of 100 in 2005 we are left wondering how many years Italy has retreated in time on this measure. Even the strongest sector in this numbers which is production looks to be weakening.
Assessments on order books and production expectations worsened (from -43 to -46 and from -3 to -5, respectively); inventories decreased.
This reinforces the message that the purchasing managers surveys have been providing which has been reinforced by this today.
Sharpest decrease in retail sales in 2013 so far
The actual reading of 37.2 is the sort of number mostly only associated with Greece and is a long,long way from the benchmark represented by the number 50. Also we see that this is now a long-standing series of declines.
This marked the twenty-sixth straight monthly decrease in sales, and the rate of decline was faster than the average over that sequence.
With a little help from my friends?
There is little sign of an improvement coming any time soon from the Euro area as this mornings collection of surveys from the European Commission informs us.
In April 2013, the Business Climate Indicator (BCI) for the euro area decreased by 0.18 points to 0.93.
In April the Economic Sentiment Indicator (ESI) decreased by 1.5 points in the euro area (to 88.6) and by 1.8 points in the EU (to 89.7)
Financial Markets are optimistic though
We are reminded one more time of the apparent divorce settlement between many equity markets and their underlying real economies by the way that the FTSEMIB has risen by 18% over the past year as the economy has turned decisively downwards. It is welcoming the new government with a rise of 1% so far today.
Also the Italian government bond market has strengthened too as market participants become more optimistic about the extent of Euro area support for Italy and the global thirst for yield quenches itself when and where it can. Italy has issued ten-year bonds at below 4% today (3.94%) and five-year bonds at below 3% (2.84%).
Whilst there is a genuine gain for Italy here in terms of debt finance which with her high level of public debt is a significant factor I have to confess that the yield seems to ignore the risks ahead.
Back on February 27th I pointed out that Italy faced a deepening problem with her level of public-sector debt.
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.
We now know that the slow down did continue and yet again seems certain to continue. Challenges abound including the fact that as she is relatively a high tax nation (42.5% of GDP in 2012) there is no easy route forwards particularly if we remember the Laffer curve.
However on the other side of the coin Italy does have private-sector wealth even if as I discussed on April 2nd the German Bundesbank seems keen to keep emphasising this factor. Also just like Spain she has a substantial black economy which just like Spain is as slippery as an eel when you try to quantify it.
But sadly I find myself coming to the conclusion that the new government will find itself dealing with economic weakness for some time. It can in the very short-term wait to see what the European Central Bank comes up with on Thursday but frankly it is hard to see what real difference a 0.25% rate cut would make. Will the new government’s role in essence involve the management of a decline?