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Italy
The Italian economy has entered the third year of recession. The new cabinet headed by professor Monti, with its high
credibility, contributed to a sizeable reduction of the average risk premiums on Italian government bonds. The issuing of a
series of important structural reforms has just started with an explicit aim at fostering the recovery of fixed investment from
both Italian and foreign enterprises. Next months will prove decisive to assess the capacity of the reform agenda to ignite
future economic recovery.
Time of recession… and reforms
A new recession
The Italian economy has entered the third year of recession. During the second
part of 2011, the overall picture of the Italian economy significantly worsened.
Since the summer, the acute tensions in the sovereign debt markets along with
the tightening of fiscal policy have adversely impacted the fragile recovery from
the global crisis of 2008-2009. The final Q4 data release confirmed that the
economy has slipped back into recession. Real GDP fell by 0.7% q/q, after -
0.2% in the previous quarter, bringing the annual growth rate in negative territory
(-0.4%) for the first time in two years. From October to December, GDP was held
back by the weakness of domestic demand, which subtracted 1 point from the
overall growth, with a negative contribution from both private consumption and
fixed investment. Net exports added 0.7 point to the GDP growth, as imports
declined for the fourth quarter in a row in line with the weakening of domestic
demand, while exports stagnated in real terms, as a consequence of the
slowdown in world trade. The change in inventories subtracted 0.4 point,
signalling a still negative perception regarding the prospects for the Italian
economy.
Restoring credibility on financial markets
Recently, a glimmer of hope appeared. Budget consolidation measures, recently
approved by the Italian Government, despite negatively impacting disposable
income, warded off more serious consequences for the real economy. The yields
on ten-year BTP declined, with the spread (versus the German Bund) falling to
around 300 bp, from more than 500 bp in January. According to Bank of Italy
estimates, such an easing is likely to boost economic growth 0.3%, mainly as a
consequence of a tamer decline in investments. Besides, a Decree Law has
been approved to improve the business environment and enhance consumers’
protection through liberalisation and deregulation. A wide reform of the Italian
labour market to spur employment growth is, as we write, under discussion.
Declining industrial production
In Q4 2011, the decline of GDP mainly reflected a worsening of conditions in the
industry, with value added contracting by 2.2% q/q the largest decline since the
spring of 2009. Industrial activity kept on contracting at the beginning of 2012,
with production decreasing by 2.5% m/m in January.
The decline of industrial activity is widespread. Textile products, food products,
beverages and tobacco products, and coke and petroleum extraction are the
only exceptions. In January, production of pharmaceuticals products fell by
4.9%, by 4.1% in that of machinery and equipment and by 2.4% in that of
transport. The production index is more than 20 percentage points below its April
2008 level.
Industrial production is estimated to have further declined in the first quarter. In
January, new orders fell by 7.4%. In the three months ending in January,
industrial orders declined by almost 3% q/q. The decline of new orders is
widespread, with the same weakness in domestic and foreign markets.
Labour difficulties weigh on private consumption
In Q4 2011, private consumption recorded its fourth consecutive decline (-0.7%),
subtracting 0.4 point from the overall GDP growth. The contraction was
particularly strong in purchases of durable goods (-7%), while spending on
services continued to increase, although moderately (+0.3%). Consumer
confidence, despite some improvement, remains below its historical average,
reflecting the worsened outlook for the labour market and the disappointing
evolution of disposable income, as a result of fiscal consolidation and higher
inflation.
In February, the unemployment rate rose to 9.3%, the highest rate in 8 years,
reaching 31.9% among young people (population aged 15-24). Employment
declined by 0.1%, with a cumulative loss of almost 650 000 jobs compared with
the pre-crisis peak of April 2008. The Italian economy suffers from a low rate of
employment: it is more than 10 percentage points lower than that of Germany.
Since the 2011 summer, purchasing power of Italian households has been
strongly hit by unfavourable evolution of real wages. The national consumer
prices index rose from 2.1% y/y in January 2011 to 3.3% in March 2012. The
increase in VAT rates, which took effect last September, spurred inflation, with
an overall impact estimated at about half a percentage point. Recently, inflation
has been pushed upwards by both higher duties on fuel and increases in some
regulated prices. In February, wages (collective agreements per hour) rose by
1.4%, almost 2 percentage points below the rate of inflation.
The downward trend in private consumption persisted at the beginning of 2012.
In January, the retail trade index fell by 0.8% y/y. Expenditures on non-food
goods declined by 1.2%, while that on food were virtually stagnant.
Fixed investment wait for brighter prospects
Several unfavourable factors are holding back fixed investment of Italian firms. In
Q4 2011, the rate of capacity utilisation in the industry sector fell to 70.4%, the
lowest in eighteen months. Italian firms’ assessment of the state of the economy
significantly deteriorated. The renewed recession impacted business confidence,
which remains at a low level by historical standard. Besides, Italian firms are
facing tighter financial conditions. Since the 2011 summer, the worsening of the
sovereign debt crisis pushed up the cost of raising fund. The situation slightly
improved recently, benefiting from a better evolution of the public debt crisis.
In Q4 2011, fixed investment recorded its fourth decline in five quarters.
Expenditures on machinery, equipment and transport declined by more than 4%
q/q. From Q3 2010 to Q4 2011, investment is down by 4%. The financial
situation of Italian firms has been mainly affected by the weakening of domestic
demand, but it also became evident that foreign demand was weakening as well,
in line with the slowdown in global trade. According to trade balance data, Italian
exports declined by 2.5% m/m in January. The annual growth rate fell to +4.3%
from +24.6% in January 2011.
Not a crunch, but a decelerating credit
According to figures released at the end of March by the ECB and the Bank of
Italy, loans to non financial corporations amounted to some EUR 906 bn in
February 2012. At the same time, bank credit to productive firms amounted to
EUR 913 bn in Germany and to EUR 875 bn in France. In February 2012,
lending to non financial corporations grew by +0.6% y/y in Italy, which compares
with +0.4% in the eurozone, +1.6% in Germany and +3.9% in France. Although
decelerating, the course of bank lending to firms does not depict a full-fledged
crunch of credit supply in Italy.
Demand for credit is decelerating as recession unfolds and fixed investment
declines. Credit intensity –bank loans to non financial corporations as a
percentage of GDP – at 57%, remains substantially higher in Italy than in
Germany (36%) and in France (44%). More than on lending, the strain caused
by the recession is felt on bank deposits from residents (excluding FMIs and
General Government), which annual growth fell into negative territory from
November 2011 to January 2012. The first signs of some relaxation appeared in
February, as residents’ deposits marked a slight increase (+0.2% y/y).
Towards a reform-led recovery?
Historically, Italian economic growth has largely depended on the external drive
of net exports. The current pattern made no exception recently. However, signs
of deceleration in exports started to surface from mid-2011 onwards. On a
seasonally-adjusted basis, from November 2011 to January 2012, Italian exports
grew by a mere 1.6% q/q while imports dropped by 2.8%.
As the drive from export gradually slows down, effects from the austerity
package are going to become more evident over the course of household
consumption. Private expenses will reflect the burden imposed by a structural
correction of public finances over the 2012-14 period. The correction in
government finances is estimated to EUR 80 bn and is expected to yield a
primary surplus of about 5% of GDP.
All in all, GDP could fall by 1.6% in 2012. A recovery could take place starting
from the beginning of next year, assuming that the succession of structural
reforms launched by the new government proves successful in improving
expectations amid foreign investors as well as among domestic firms and Italian
households. At the end of 2011 the pension reform was swiftly passed with a
wide support from the population. The approval of a new reform of the labour
market will face a more complex trade-off between effectiveness and consensus.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Italy
The Italian economy has entered the third year of recession. The new cabinet headed by professor Monti, with its high
credibility, contributed to a sizeable reduction of the average risk premiums on Italian government bonds. The issuing of a
series of important structural reforms has just started with an explicit aim at fostering the recovery of fixed investment from
both Italian and foreign enterprises. Next months will prove decisive to assess the capacity of the reform agenda to ignite
future economic recovery.
Time of recession… and reforms
A new recession
The Italian economy has entered the third year of recession. During the second
part of 2011, the overall picture of the Italian economy significantly worsened.
Since the summer, the acute tensions in the sovereign debt markets along with
the tightening of fiscal policy have adversely impacted the fragile recovery from
the global crisis of 2008-2009. The final Q4 data release confirmed that the
economy has slipped back into recession. Real GDP fell by 0.7% q/q, after -
0.2% in the previous quarter, bringing the annual growth rate in negative territory
(-0.4%) for the first time in two years. From October to December, GDP was held
back by the weakness of domestic demand, which subtracted 1 point from the
overall growth, with a negative contribution from both private consumption and
fixed investment. Net exports added 0.7 point to the GDP growth, as imports
declined for the fourth quarter in a row in line with the weakening of domestic
demand, while exports stagnated in real terms, as a consequence of the
slowdown in world trade. The change in inventories subtracted 0.4 point,
signalling a still negative perception regarding the prospects for the Italian
economy.
Restoring credibility on financial markets
Recently, a glimmer of hope appeared. Budget consolidation measures, recently
approved by the Italian Government, despite negatively impacting disposable
income, warded off more serious consequences for the real economy. The yields
on ten-year BTP declined, with the spread (versus the German Bund) falling to
around 300 bp, from more than 500 bp in January. According to Bank of Italy
estimates, such an easing is likely to boost economic growth 0.3%, mainly as a
consequence of a tamer decline in investments. Besides, a Decree Law has
been approved to improve the business environment and enhance consumers’
protection through liberalisation and deregulation. A wide reform of the Italian
labour market to spur employment growth is, as we write, under discussion.
Declining industrial production
In Q4 2011, the decline of GDP mainly reflected a worsening of conditions in the
industry, with value added contracting by 2.2% q/q the largest decline since the
spring of 2009. Industrial activity kept on contracting at the beginning of 2012,
with production decreasing by 2.5% m/m in January.
The decline of industrial activity is widespread. Textile products, food products,
beverages and tobacco products, and coke and petroleum extraction are the
only exceptions. In January, production of pharmaceuticals products fell by
4.9%, by 4.1% in that of machinery and equipment and by 2.4% in that of
transport. The production index is more than 20 percentage points below its April
2008 level.
Industrial production is estimated to have further declined in the first quarter. In
January, new orders fell by 7.4%. In the three months ending in January,
industrial orders declined by almost 3% q/q. The decline of new orders is
widespread, with the same weakness in domestic and foreign markets.
Labour difficulties weigh on private consumption
In Q4 2011, private consumption recorded its fourth consecutive decline (-0.7%),
subtracting 0.4 point from the overall GDP growth. The contraction was
particularly strong in purchases of durable goods (-7%), while spending on
services continued to increase, although moderately (+0.3%). Consumer
confidence, despite some improvement, remains below its historical average,
reflecting the worsened outlook for the labour market and the disappointing
evolution of disposable income, as a result of fiscal consolidation and higher
inflation.
In February, the unemployment rate rose to 9.3%, the highest rate in 8 years,
reaching 31.9% among young people (population aged 15-24). Employment
declined by 0.1%, with a cumulative loss of almost 650 000 jobs compared with
the pre-crisis peak of April 2008. The Italian economy suffers from a low rate of
employment: it is more than 10 percentage points lower than that of Germany.
Since the 2011 summer, purchasing power of Italian households has been
strongly hit by unfavourable evolution of real wages. The national consumer
prices index rose from 2.1% y/y in January 2011 to 3.3% in March 2012. The
increase in VAT rates, which took effect last September, spurred inflation, with
an overall impact estimated at about half a percentage point. Recently, inflation
has been pushed upwards by both higher duties on fuel and increases in some
regulated prices. In February, wages (collective agreements per hour) rose by
1.4%, almost 2 percentage points below the rate of inflation.
The downward trend in private consumption persisted at the beginning of 2012.
In January, the retail trade index fell by 0.8% y/y. Expenditures on non-food
goods declined by 1.2%, while that on food were virtually stagnant.
Fixed investment wait for brighter prospects
Several unfavourable factors are holding back fixed investment of Italian firms. In
Q4 2011, the rate of capacity utilisation in the industry sector fell to 70.4%, the
lowest in eighteen months. Italian firms’ assessment of the state of the economy
significantly deteriorated. The renewed recession impacted business confidence,
which remains at a low level by historical standard. Besides, Italian firms are
facing tighter financial conditions. Since the 2011 summer, the worsening of the
sovereign debt crisis pushed up the cost of raising fund. The situation slightly
improved recently, benefiting from a better evolution of the public debt crisis.
In Q4 2011, fixed investment recorded its fourth decline in five quarters.
Expenditures on machinery, equipment and transport declined by more than 4%
q/q. From Q3 2010 to Q4 2011, investment is down by 4%. The financial
situation of Italian firms has been mainly affected by the weakening of domestic
demand, but it also became evident that foreign demand was weakening as well,
in line with the slowdown in global trade. According to trade balance data, Italian
exports declined by 2.5% m/m in January. The annual growth rate fell to +4.3%
from +24.6% in January 2011.
Not a crunch, but a decelerating credit
According to figures released at the end of March by the ECB and the Bank of
Italy, loans to non financial corporations amounted to some EUR 906 bn in
February 2012. At the same time, bank credit to productive firms amounted to
EUR 913 bn in Germany and to EUR 875 bn in France. In February 2012,
lending to non financial corporations grew by +0.6% y/y in Italy, which compares
with +0.4% in the eurozone, +1.6% in Germany and +3.9% in France. Although
decelerating, the course of bank lending to firms does not depict a full-fledged
crunch of credit supply in Italy.
Demand for credit is decelerating as recession unfolds and fixed investment
declines. Credit intensity –bank loans to non financial corporations as a
percentage of GDP – at 57%, remains substantially higher in Italy than in
Germany (36%) and in France (44%). More than on lending, the strain caused
by the recession is felt on bank deposits from residents (excluding FMIs and
General Government), which annual growth fell into negative territory from
November 2011 to January 2012. The first signs of some relaxation appeared in
February, as residents’ deposits marked a slight increase (+0.2% y/y).
Towards a reform-led recovery?
Historically, Italian economic growth has largely depended on the external drive
of net exports. The current pattern made no exception recently. However, signs
of deceleration in exports started to surface from mid-2011 onwards. On a
seasonally-adjusted basis, from November 2011 to January 2012, Italian exports
grew by a mere 1.6% q/q while imports dropped by 2.8%.
As the drive from export gradually slows down, effects from the austerity
package are going to become more evident over the course of household
consumption. Private expenses will reflect the burden imposed by a structural
correction of public finances over the 2012-14 period. The correction in
government finances is estimated to EUR 80 bn and is expected to yield a
primary surplus of about 5% of GDP.
All in all, GDP could fall by 1.6% in 2012. A recovery could take place starting
from the beginning of next year, assuming that the succession of structural
reforms launched by the new government proves successful in improving
expectations amid foreign investors as well as among domestic firms and Italian
households. At the end of 2011 the pension reform was swiftly passed with a
wide support from the population. The approval of a new reform of the labour
market will face a more complex trade-off between effectiveness and consensus.
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