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Friday, May 15, 2009

Italian GDP Falls An Annualised 9.6% In The First Three Months Of 2009

by Edward Hugh: Barcelona

Italy's recession deepened at the start of 2009, with first-quarter gross domestic product falling to its worst level since at least 1980, confirming the impression that Europe's fourth-largest economy is now headed for its worst downturn since World War II. Preliminary data from the national statistics office (Istat) show that Italian GDP fell 2.4% in the first quarter when compared with the last quarter of 2008. This follows a downwardly revised 2.1% contraction in the fourth quarter of last year. Annualised this means a 9.6% contraction rate during the three months, which is very high indeed.

Year on year GDP fell by 5.9%, which was also the sharpest drop since Istat's most recent data series starts in 1980 - or for at lest 29 years. The contraction was even worse than analysts were predicting, with the consensus having been for a 1.8% drop on the quarter and a 5% one on the year.

According to ISTAT, even if GDP stays flat for the remaining three quarters of the year, 2009 GDP will contract by 4.6%. According to my rough calculations, Italy's GDP was on about the same level this quarter as it was in the first three months of 2005, and from here we are travelling back in time.

But GDP is not remaining flat, even if the pace of contraction seems to have slowed in the present quarter.

PMIs Show Continuing Contraction - Although The Rate Eased In April

Italy continued to register the steepest overall fall in retail sales in the Eurozone in April according to the Bloomberg Retail PMI. The month-on-month sales index did however rise from 41.9 in March to 46.8 giving the slowest rate of decline since October 2007. Retail sales have now fallen for 26 months consecutively according to survey data.

Manufacturing Output Falls

Italy's manufacturing business shrank at its slowest rate for six months in April, with the latest Markit/ADACI survey producing a headline PMI reading of 37.2 - significantly above March's record low of 34.6 and beating the consensus forecast of 36.5.

In addition other recent data suggest that the lowest point may have been past with business confidence improving in April (following 10 consecutive monthly falls), and consumer morale hitting its highest level in 16 months. However Markit reported that about 40 percent of companies in the survey reported new order levels continued to fall during the month, even though at the slowest rate of decline in seven months. Output fell at its slowest rate since October, with the sub-index jumping to 35.9 in April from 32.8 in March. Overseas orders, even though they fell less sharply in April, still clocked up their 14th successive month of decline, with Markit noting that demand was particularly weak from Eastern Europe and Russia.

And job losses in Italy's manufacturing sector showed no signs of letting up and were running at the second fastest rate in almost 12 years of data collection following the record low hit by the employment index in March.

However, saying that the "darkest hour" in this contraction may be over is not the same thing as saying that recovery is anywhere in sight. Italy's manufacturing PMI has now not indicated growth since February 2008 and forecasts generally expect the economy to contract by around four percent this year, making for two straight years of continuous contraction for the first time since World War Two. Indeed, the Organisation for Economic Cooperation and Development has even already pencilled in a potential further contraction for 2010, which if realised will mean Italy's economy will have been shrinking for an almost unprecedented 3 years continuously.

As Does Services

Italian service sector activity contracted for the 17th consecutive month in April although at the slowest rate for six months. The Markit/ADACI Purchasing Managers' Index rose to 42.0 from 39.1 in March, but still is not that far above the record low of 37.9 recorded in February. Activity has now been stick below the 50 mark that separates growth from contraction since November 2007.

The survey showed new business shrinking for the eighteenth straight month in April, though the rate of decline eased for the second month running, while expectations of business in a year's time rose to an eight-month high. As elsewhere, while optimism is rising Markit did point to record job losses as a likely on consumer spending looking ahead, making hopes of a swift recovery extremely premature. The employment sub-index fell to 44.0 from 44.6, as firms cut jobs at a survey record rate in response to the ongoing loss of business. The survey is thus consistent with other recent indicators that have pointed to an economy still mired in the deep recession that began in spring of last year, but with some grounds for thinking that the lowest point may now have been passed.

Deflationary pressure remained evident with service firms cutting their prices for the seventh month running and at the fastest rate in the survey's history in response to weak demand, while input prices showed no monthly increase for the first time since the survey began. The Italian government slashed its economic forecasts last week, and now project gross domestic product to fall by 4.2 percent this year following last year's 1.0 percent decline. The International Monetary Fund is more pessimistic, forecasting a 4.4 percent fall this year and a further drop of 0.4 percent in 2010. Italy thus now possibly faces three years of economic contraction one after the other although previously the country had not posted two consecutive years of falling GDP in its entire post-war history.

Business and Consumer Confidence Rebound Slightly

Italian consumer confidence rebounded slightly in April and reached its highest level since December 2007 as the lure of slowing inflation seemed to offset concerns about rising unemployment. The Isae Institute’s consumer confidence index rose to 104.9 from 99.8 in March.

Italian business confidence also rose as companies saw signs of an increase in orders of goods and services following the sighting of green sprouts everywhere except under our noses. The Isae Institute’s business confidence index climbed to 64.2 from a revised 60.9 in March.

Industrial Output

Industrial output simply declined and declines, and fell in March for an 11th consecutive month. Output dropped a seasonally adjusted 4.6 percent from February, when it fell a revised 4.6 percent, according to data from the national statistics office. From a year earlier, adjusted production fell 23.8 percent. Fiat has laid off about half of its 78,000 national workforce in using temporary state-subsidized programs. Sales of their cars fell 16 percent in Italy in the first quarter, according to data from the trade association ANFIA.

Exports Remain Very Weak

Italy's trade deficit increased dramatically to 837 million euros in February, almost double the 449 million euros recorded in the same month in 2008. Istat said a fall in demand was recorded in all sectors, but the automobile sector was particularly hard hit with a fall in exports of 46 percent. Trade in the chemical sector was down 29.5 percent, electrical goods were down 27.3 percent and exports of other manufactured goods fell by 22.7 percent.

Imports were down by 25.3 percent at 24.3 billion euros while exports were down by 23.7 percent at 23.5 billion euros. The results, however, were slightly better than in January, when imports were 23.4 billion euros and exports 19.8 billion euros. This was effectively the worst decline in exports since these statistics were first compiled by ISTAT in 1993.

No End To The Recession In Sight
Italy effectively entered recession in third quarter of 2008, and the economy now looks bound to shrink the most in more than half a century this year. The International Monetary Fund forecast on April 22 that the jobless rate will reach 8.9 percent this year and 10.5 percent in 2010. At the same time, Italian inflation has been slowing and hit a record low of 1.1 % in March, so if the contraction continues the deflation threat is real and present.

According to the latest EU Commission forecast Italy’s gross domestic product will fall this year by 4.4 percent, more than twice the 2 percent it predicted three months ago. This is bound to have a substantial impact on government debt, and the Italian government already accepts that the budget deficit will rise this year and breach the European Union limit of 3 percent of GDP. Government spending climbed 21 percent in the first quarter from a year earlier, while revenue fell 4.8 percent, the Bank of Italy said on May 13. The EU Commission forecast a deficit of 4.5% of GDP this year and 4.8% in 2010. As a result gross government debt is projected to climb from 105.8% of GDP in 2008 to 113% in 2009 and 116.1% in 2010. A grim picture, and no easy solutions.