Nobody could have seen this coming!
Well, “nobody” except for all the economists polled by Bloomberg, because their consensus forecast for Italy’s economy now lines up with the outlook of the Italian Treasury by virtue of the latter’s assessment catching down to reality.
According to “two senior officials” familiar with the Treasury’s draft outlook, the Italian economy will grow by just 0.1% in 2019, a sharp downward revision from the previous forecast of a 1% expansion. “Naturally”, the budget deficit will now be wider, ballooning to between 2.3% and 2.4% of GDP, which is of course not consistent with the 2.04% compromise the country’s coalition government struck with Brussels last year, when the populists looked poised to risk a financial crisis in the interest of proving their anti-“eurocrat” bonafides to voters.
Italy fell into a technical recession in Q4 and the worsening economic outlook has the potential to pull the populists from both sides – voters will want expansionary fiscal policy to help alleviate the malaise, while Brussels will invariably insist that in the absence of tighter fiscal policy, a rapidly deteriorating growth outlook is a recipe for the country to end up embroiled in another budget battle with the European Commission.
“We cannot tighten our fiscal policy more because we are in the middle of this recession and slowdown”, poor Giovanni Tria said late last month in China, adding that Italy “needs to increase our growth rate and embark on a path of reducing the debt-to-GDP ratio.” That’s obviously true, but it’s comically vacuous – like saying “I need to get rich and pay off all my debt.”
It is entirely possible that the recession will drag into Q1 amid a still tenuous outlook for the euro-area economy and ongoing signs of weakness out of Germany.
At the same event mentioned above, Tria again cited external conditions as an aggravating factor. “Our pace of growth also depends on what’s happening on trade at global level”, he remarked, on the way to reminding folks that “there is a very strong interdependence between the Italian manufacturing sector and the German manufacturing sector, and now we are in a phase of slowdown of the German manufacturing sector.”
He’s right about that. Data out Thursday showed German factory orders slumping a grievous 4.2% MoM in February.
Just as German equities are having a blockbuster start to 2019 despite the recessionary backdrop, Italian stocks have surged. The FTSE MIB entered a bull market on Wednesday and Italian banks are one reason why. Unicredit, for instance, is up an insane 25% YTD (hilariously, FT reported on Thursday that the bank is pondering a bid for Commerzbank in the event the Deutsche merger falls through).
One thing worth noting is that the outperformance of Italian equities versus the broader European market is starting to become detached from the “reality” of the BTP-bund spread.
Underscoring the extent to which the Italians are hamstrung in their capacity to rescue the economy, a set of measures designed to shore up growth appears set to be laughed off the proverbial stage by analysts and international observers.
According to a 74-page draft of the decree seen by Bloomberg, Rome is set to implement a series of “micro” measures which sound wholly insufficient. “The draft outlines some 60 items, from energy incentives to a 100 million-euro fund to encourage first-time home buyers, to moves to protect the ‘Made in Italy’ brand and tax breaks for companies that invest in new equipment”, Bloomberg wrote Wednesday, summarizing the draft, before quoting one analyst at IG Markets in Milan as likening the package to “trying to kill a monster with a water pistol.”
Speaking of “monsters”, Matteo Salvini – who on Wednesday refused to offer safe harbor to some five-dozen refugees rescued floating around off the coast of Libya in a rubber dinghy – is convening an actual summit of far-right parties in Milan next week. Here’s The Guardian to explain:
Salvini is attempting to position himself as the informal leader of Eurosceptic, populist forces in Europe, but it remains unclear whether any kind of formal coalition will work, given policy differences between parties and the tangled web of alliances already at play inside the European parliament.
Europe’s rightwing populists are in power in Italy, Hungary, Austria and Poland and are riding high in several countries including France and the Netherlands, and, according to polls, will make significant advances in May’s elections. However, they are not predicted to form a majority and most analysts believe they will struggle to present a united front.
Italian media reported that far-right parties from as many as 20 countries were invited to the event, due to be held on Monday at a luxury hotel in Milan.
There’s a lot to “like” about that. It’s like dinner for schmucks only everybody is a schmuck and all the schmucks are hell-bent on undercutting Western democratic norms. It’s also amusing that it’s being held at a “luxury hotel” – because, you know, that’s where the downtrodden working man hangs out and dines, right?
“The difference between us and others is that they have to go abroad to seek alliances… but the League invites European movements to Italy, our country has become central, thanks to this government”, Salvini remarked, effectively boasting that Italy has now become a global hub for political insanity.
In case it’s not clear enough, Di Maio might as well just go ahead and resign himself to a life spent laboring in some low-level position of no consequence, because Salvini is going to drive Luigi into obscurity eventually. Italy is a small country, and there is no room for Di Maio at a time when Salvini’s larger-than-life personality is hogging up all the space.
Anyway, you get the idea. The Italian economy is in all kinds of trouble and that’s set against an exceptionally fractious domestic political situation that finds an ascendant Salvini not only asserting himself domestically, but attempting to position himself as the leader of a bloc-wide, right-wing coalition.
Paradoxically, one-man rule under Salvini (which I continue to believe is the most likely outcome for Italy, all checks and balances, etc. notwithstanding) might actually be received well by the market, but it’s far too early for anyone to try and price that in. That, in turn, means that Italian stocks are probably running on the same FOMO/central bank sugar high as other risk assets.