Europe slowing – Italy joins watch list

From the AFP

Private sector activity in the eurozone was weaker than forecast in June, hitting 20-month low level with recoveries slowing in Germany and France, a key growth indicator showed on Tuesday.

The data showed that output fell in Italy and Spain while Ireland continued to record a “very modest” pace of expansion, according to the Purchasing Managers Index (PMI) leading indicator compiled by research firm Markit.

“Over the past two months, the region has seen the sharpest slowing in growth since just after the collapse of Lehman?s in late-2008,” said Markit chief economist Chris Williamson.

The PMI, a survey of 4,500 companies in service and manufacturing in the 17-nation eurozone, fell to 53.3 points in June from 55.8 in May. A first estimate last month had forecast 53.6 points for June.


“The further loss of momentum in June bodes ill for the third quarter and suggests that growth may weaken further unless order books improve,” Williamson said.

“National growth variations are also a worry. Of the four largest Eurozone nations, only Germany continued to record a PMI which is consistent with strong quarterly GDP growth in June, although even here the pace has slowed sharply.

“The PMIs are meanwhile consistent with only modest growth rates in France and Spain, while a risk of double-dip recession is highlighted in Italy.”

The manufacturing sector saw a sharp drop, from 54.6 in May to 52 points in June, while services also slowed from 56 to 53.7 points.

Italy’s services PMI was 47.4 which is a contraction and the lowest reading in nearly 2 years. It is down from 50.1 in May and well below the forecast of 49.6. To make it worse just 5 days ago Italy enacted a multi-year program of budget austerity.

The approval of Italy’s 47-billion- euro austerity package late Thursday comes amid the release of an array of poor economic indicators and a warning from a leading ratings agency that Italy’s debt rating could be downgraded.

Government passed the measure during an emergency session Thursday and a declaration from Italian Prime Minister Silvio Berlusconi to say that it would allow the country to balance its budget by 2014. The plan focuses on reducing corporate taxes, reducing government travel expenses, freezing salaries of public employees, and tracking down tax evaders.

But the U.S.-based ratings agency Standard & Poor’s indicated it was not convinced. The agency called Italy’s plans “credible” but said the size of the package was too small to make a big difference, and it said the package might have also overestimated the impact that a series of measures aimed at drawing money from tax evaders.

I am not sure what S&P are talking about. This package will make a big difference. The next two charts tell me that.

Another non-net exporting country with high levels of debt attempting an austerity budget while maintaining a fixed exchange rate with most of its trading partners, and an overvalued currency based on its productivity with the rest of the world. Sound familiar?

As usual the locals think they are different and that the basic rules of economics don’t apply in their country.

Some market players have said Italy will be the next to ask for a bailout but Federico Ghizzoni, chief executive of Italian bank Unicredit, told CNBC that the country is in a totally different situation than Greece.

Which is exactly what they said about Portugal.

Italy is now officially on DE suicide watch.

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  1. I’m coming to the view that the reason the RBA held rates was less to do with the domestic economy, far more to do with the global one!

  2. it was relatively easy to “save” small economies (Greece, Portugal, Ireland) but 8th (Italy) and 12th (Spain) world’s largest economies. There is no printing press that is able to do that. In few years we will ask ourselves how we even considered the case without big economic catastrophe in the middle.

  3. Nice post DE but what about Australia ? modest trade surplus massive household savings north of 10% and the fastest fiscal consolidation in post war period.
    In my line of work I hear of businesses going to the wall almost every day.
    One wonders if Julia is now trying to stimulate the insolvency profession.

    • >Nice post DE but what about Australia ? modest trade surplus massive household savings north of 10% and the fastest fiscal consolidation in post war period.

      It all sounds promising as long a you forget about household indebtedness… and savings is something I hope to discuss sometime in the near future.

    • And (correct me if I’m mistaken), doesn’t “household savings” include money put into mortgages, which may well soon be worth less than what the home “owner” paid for it. And therefore not saving at all, but throwing money down a pit toilet of some sort?

  4. I have seen a similar idea applied to the Eurozone. Perhaps not the whole debt, but enough for nations to service, banks to take a haircut but keep something on the books etc – but how would the derivitives market deal with that scenario. Almost could have worked in the old days, now I suspect the layers of financing are so complex it would be a hell of a tricky task.

    I relation to the US, perhaps if it is undertaken in conjunction with a restating Glass Streagall, tighter regulatory controls and an understanding that the activities of investment banks will not be underwritten by Government – there needs be some attempt to ensure the situation does not, like history, repeat itself. But all in all, off the top of my head – if its really broken – throw it out. Whether action like this would undermine faith and trust in the entire financial system is one consideration – well, maybe not, faith and trust has already been undermined, perhaps irreparably. All worthy ideas should be openly debated because the genius moment may come from the unexpected!

  5. Agreed about Italy DE. I love the place dearly, but the level of corruption and lax tax collecting is ASTOUNDING!

    Not as bad as the Greeks (I’ve been told) and the Italians have a proud and energetic manufacturing industry, but government waste is amazingly, and welfare is ingrained within the culture.

    They also have an enormous demographic problem – combined this with a mainly cash economy (in the depressed south (Calabria e.g) over 50% of the economy is cash only) it makes trying to pay for all this extremely hard.

    Spain is similar.

    As I’ve said before, economists and bureaucrats need to look past mathematical models and spreadsheets when coming up with their grandiose plans and ideas – culture matters more than that….and the Italians ain’t Swiss or German.

  6. Just to put things into perspective, the new austerity package being discussed in Italy is for about 50 billion euros. However, Italy has to pay, every year, 70 billion euros only to cover interest repayments on the public debt….