Not that it should be a surprise to most MB readers, but the economic data coming out of nations within the Eurozone is once again “worse than expected”. Last night it started with Italy:
Italy’s economy contracted more than expected in the first quarter of 2013, shrinking 0.5% from the previous three months as activity fell in all sectors except farming, national statistics institute Istat said Wednesday.
Gross domestic product in the euro zone’s third-largest economy has now contracted for seven consecutive quarters, the longest recession since Istat began compiling comparable data in 1990.
The preliminary figure, adjusted for seasonal factors and the number of working days, was markedly worse than the average forecast of a 0.3% quarterly contraction in a Dow Jones Newswire poll of 19 economists.
Italy’s GDP shrank 2.3% from the fourth quarter of 2012, Istat said, slightly worse than the average forecast of a 2.2% annual decline.
While dismal, Italy’s economy didn’t decline as sharply as it did in the final three months of 2012, when it shrank 0.9% from the previous quarter.
I’ve spoken about Italy a number of times previously, what the country needs is growth, it isn’t coming. From January 2012:
Italy does have the advantage that over 75% of its public debt is long term with an average maturity of approximately 7 years and only about 12% of that is variable interest rate. This means that even though Italian yields are high now ( 10yr @ 7.11) the flow-on effect to the overall deficit is relatively limited.
The real problem in Italy is that its economy has been stagnate for nearly the entire decade. According to the IMF between in 2000-2010 among all countries of the world Italy only grew faster than Haiti and Zimbabwe. In 2010, Italian GDP was only 2.5% higher than in 2000. This problem is actually made worse by the fact that this is such a long term trend. Italy’s per-capita GDP growth was 5.4% in the 1950s, 5.1% in the 1960s, 3.1% in the 1970s, 2.2% in the 1980s and 1.4% in the 1990s. Since the new millennium the country has hardly moved forward and if we extrapolate out that trend Italy will spend the next decade in contraction.
On top of stalling growth, Italy has a demographics issue. With a debt to GDP ratio at 120% along with a population with a median age of approximately 45 Italy really does look like the Japan of Europe. The only problem is Japan is competitive, runs a trade surplus and is sovereign in its own currency. Italy has none of these things.
Given all of these problems it will be interesting to see what Mario Monti can come up with to get the country back onto a path to growth while staying in the Euro and meeting the countries existing obligations. It would appear to be a monumental task.
And we can now see, even with the steerage of Mario Monti, nothing has changed. The long term trend of shrinking rates of GDP growth continues and, given current EZ policies, its hard to see that changing in the coming year. We’ve seen over the last month that the economic retrenchment is slowly seeping into the banking system through bad loans as unemployment remains over 10%. On top of that the latest PMI data continues to show that manufacturing is in contraction and forward looking data suggests it will stay there for the coming year at least.
But Italy certainly isn’t alone. France too, is back into recession:
France has entered its second recession in four years after the economy shrank by 0.2% in the first quarter of the year, official figures show.
Its economy shrank by the same amount in the last quarter of 2012.
President Francois Hollande has said he expects zero growth in 2013, lower than a 0.1% growth forecast by the French government.
Separate figures showed that the recession across the 17-nation eurozone has continued into a sixth quarter.
A recession is defined as two consecutive quarters of negative growth.
The economy of the 17-nation bloc shrank by 0.2% in the January to March period, according to the EU’s statistics office Eurostat, with nine of its members now in recession. Within the zone, France has record unemployment and low business and consumer confidence.
Again this should come as no surprise, I’ve been speaking about France for nearly 2 years. The structure of its economy at present is based on internal consumption which requires external capital. Attempted austerity in the government sector was always going to slow the economy, the issue now, as it is with many European nations, is exactly what is the credible plan to make the transition from this model to one of export-led growth in an environment of non-floating currency and while major trading partners are all trying the same trick. The most likely outcome, unfortunately, is a deflationary spiral across the zone leading to much higher unemployment, large loss of private sector wealth and eventually political and social unrest.
I’ve discussed previously that monetary policy of the kind being implemented by the ECB can only do so much and is very unlikely to be able to offset the fiscal policy being implemented across Europe, no matter what Mr Draghi says about it every month, and that continues to show in the data.
France now joins Greece, Spain, Italy, Cyprus, Portugal, the Czech Republic, Hungary, Belgium, Finland and the Netherlands into recession, but there will be more to come.