And finally (I think), here’s our news story about Italy’s downturn:
Thanks for reading and commenting. GW
Three recessions in barely a decade, and not too much growth in between....
Italian PM: Germany is holding us back
Italian prime minister Giuseppe Conte is adamant that Italy’s economy will recover this year.
Here’s what he told reporters:
“I’m not at all worried ... Even the most naive analysts know that at this moment there is a trade war going on between the United States and China.
Above all, Germany is holding us back ... it’s a transitional phase, which depends on external factors
We are interested in focusing on the relaunch of our economy, which will certainly take place in 2019 ... This relaunch will hit full capacity in the second half.”
But is Germany really to blame? We know that the eurozone’s largest economy did contract in July-September, and more recent data has been disappointing too. However, German Q4 GDP data hasn’t been released yet.
Also France, which is vulnerable to the same forces, actually grew by 0.3% in the last quarter - despite the disruption from the Yellow Vest protests. Germany’s slowdown hasn’t helped, but Italy’s problems go deeper.
Italy’s slide into recession leaves a “black mark” on its populist government’s early track record, says Oxford Economics.
Here’s their take:
- In Italy, recent data show that its economy fell into recession in the second half of last year. The first estimate of Italy GDP published today showed a drop in GDP of 0.2% in Q4 − a touch worse than our estimate. Italy’s national statistical office has not yet published the GDP components, but it stated that net trade provided a positive contribution to growth, while domestic demand was negative.
- We expect Italy’s consumer demand to have remain subdued and investment to have dropped for the second consecutive quarter during Q4, due to lower business confidence, higher uncertainty and lower supply of credit.
- The government’s narrative that the problems are mainly from abroad is at odds with some of the data since net trade was positive for the second consecutive quarter while Spanish and France GDP numbers were more solid in Q4 (respectively at +0.7% and +0.3%).
- Moreover, the gap between Italian GDP growth and that of the rest of the Eurozone has been widening again, reinforcing our view that idiosyncratic factors (such as negative market reactions, uncertainty and falling confidence) have played a big part.
- Looking forward, the moderation in domestic financial market stress and the stabilisation in some indicators, such as employment, should set the stage for a stabilisation in Italian GDP in Q1 2019, but the risks remain clearly on the downside. The recession could drag on into the first half of 2019, particularly if confidence continues to disappoint.
- Given the worse than expected GDP number in Q4, we will very likely revise down our Italy forecasts (currently at an already weak 0.3%).
- 019 will very likely be remembered as a year of no growth in Italy − not a great track-record for the first year of the populist government.
Italy’s stock market has not taken the recession well.
The FTSE MIB index of top Italian companies has dropped by 0.7%, or 133 points to 19,638, making it the worst-performing major European index today.
Economist Nicola Nobile doesn’t believe PM Conte’s line that trade conflict dragged Italy into recession:
Recession in ITA. The government's narrative that the problems are from abroad is at odds with some of the data (net trade was positive for the second quarter and Spanish and France GDP were robust).Negative markets reactions, uncertainty and falling confidence played a big part. pic.twitter.com/ylrFw93siM
— nicola nobile (@niconobivalgre) January 31, 2019
Italy’s problem isn’t simply that it’s suffered three recessions in a decade - although that’s bad enough.
It has also struggled to post significant growth in the upturns between the downturns - meaning it has steadily lagged behind eurozone neighbours.
That stagnation eventually led to the election of its current populist government - who argued passionately that the only route out of the mess was to tax less, and spend more.
That Keynesian approach, through, doesn’t square with the eurozone’s fiscal targets, especially as Italy has to service a huge national debt of €2.3 trillion.
Italy now in its third recession in ten years...https://t.co/sswIzRaDQa pic.twitter.com/qBwUPMfwIN
— Ben Chu (@BenChu_) January 31, 2019
Italy’s prime minister, Giuseppe Conte, seems to have blamed the recession on the US-China trade war....
Conte says recession in Italy is temporary and mostly a result of external factors ie trade tension. No mention to domestic weakness or bond market jitters over politics
— Maria Tadeo (@mariatad) January 31, 2019
Andrea Iannelli, investment director at Fidelity International, says Italy was dragged into recession by problems at home, and abroad:
“The latest Italian GDP numbers may come as no surprise to investors, but it does highlight the challenges that still lie ahead for the country and the coalition government.
The slowdown in the country’s major trading partners are partly to blame. However, the standoff between the government and the European authorities over the budget in the summer of 2018 has exacerbated the country’s weaknesses.
Italian deputy PM: Eurozone austerity must end
One of the leaders of Italy’s coalition partners has blamed his predecessors, and European austerity, for the country’s economic mess.
Deputy PM Luigi Di Maio, head of Movement Five Star, says the recession is proof that Europe’s budget rules should be relaxed - to allow Italy to stimulate its economy back to growth.
He’s clearly still unhappy that Rome’s attempts to run a deficit of 2.4% of GDP this year were blocked by the EU.
Di Maio said the previous centre-left government - ousted this spring - was to blame for the recession.
He added that this year’s EU parliamentary elections will effectively be a referendum on eurozone fiscal policy, saying:
“I believe this referendum will have a positive outcome for those who are against austerity.”
(thanks to Reuters for the quotes)
Full story: Italy slips into recession and weighs on eurozone economy
If you’re just tuning in, here’s Associated Press’s take on Italy’s fall back into recession.
The Italian economy slipped into recession in the final three months of the year, weighing on the wider eurozone’s growth, official figures showed Thursday.
The Italian statistics agency said that Italy, the third-largest economy in the 19-country eurozone, contracted by a quarterly rate of 0.2% in the fourth quarter.
Following a 0.1% drop in GDP in the previous three-month period, that means Italy is in a technical recession, defined as two straight quarters of economic contraction.
The Italian economy has been hobbled by a lack of confidence and waning business activity following the new populist government’s spat with the European Union’s executive Commission over its budget plans.
The recession in Italy has weighed on the wider eurozone, which grew by only 0.2% in the final three months of 2018, the same as in the previous quarter.
As a result, EU statistics agency Eurostat said that the eurozone expanded by 1.8% in 2018 overall. That’s a weak figure after the bloc had started the year predicting only a modest slowdown from 2017’s 2.3% rate.
The eurozone has also been hobbled by an unexpected slowdown in Germany, Europe’s biggest economy, which suffered an unexpected contraction in the third quarter largely due to changes in emissions standards that snarled auto sales. And uncertainty over Britain’s exit from the EU has weighed on sentiment.
This slide into recession is a blow for Italy’s coalition government, and caps a turbulent year.
It means Italy’s economy has been shrinking steadily since the right wing League Party formed a coalition with the anti-establishment Movement Five Star.
That coalition spent months battling with Brussels over their plans to cut taxes and boost spending - arguing that Italy’s economy needed a stimulus.
However, the resulting political crisis appears to have hurt economic confidence, as well as driving up Italy’s borrowing costs.
Now that Italy is in recession, the growth targets which underpin Rome’s 2019 budget now look very unrealistic. That means its government may have to choose between dropping spending plans, raising taxes, or blowing through its deficit targets.
AsJames Athey of Aberdeen Standard Investments puts it (via Bloomberg):
“The growth forecasts on which the budget was based have already been blown out of the water and euro-zone growth continues to weaken.
Italy is going to have to face up to some real problems.”
2018 was not a vintage year for the euro area.
Eurostat estimates that eurozone GDP grew by 1.8% during 2018 as a whole, down from 2.5% in 2017.
Analysts are pointing out that Italy’s long-term economic performance is pretty dire.
Here’s Arne Petimezas, analyst at AFS Group:
Italy didn't enter a new recession because it never recovered from the prior two recessions. Italian GDP performance is 1930's stuff. pic.twitter.com/4txhS5f2cL
— Arne Petimezas (@APetimezas) January 31, 2019
Fred Ducrozet of Pictet Asset Management flags up that Italy is, by some distance, the worst-performing Big Four eurozone member.
Still an amazing chart, ten years on.
— Frederik Ducrozet (@fwred) January 31, 2019
Germany = a blip
France = growing malgré tout
Spain = boom-bust-boom
Italy = THIRD RECESSIONS IN A DECADE pic.twitter.com/dk9Iji5Hhu
Summary
Italy’s economy has barely grown over the last year - today’s report shows GDP only rose by 0.1% annually.
Indeed, Italy has only managed meagre growth since the financial crisis:
#Italy quarterly GDP growth, for some perspective. Hardly ever recovered since the global financial crisis pic.twitter.com/1CoAW57nzi
— ForexLive (@ForexLive) January 31, 2019
Sky’s News’s Ed Conway points out that Italy is the first G7 economy to plunge into recession in over three years:
Italy is in recession. Economy shrank by 0.2% in Q4 of 2018, following a 0.1% fall in Q3. Deeper than economists expected. First G7 member state to be in recession since 2015 (Canada). First major EU economy to face recession since 2013
— Ed Conway (@EdConwaySky) January 31, 2019
You can see the Italian GDP report online, here.
Italy falls into recession
Italy has plunged back into recession!
New GDP figures show that its economy shrank by 0.2% in the final three months of 2018, a worse result than expected.
That follows a 0.1% contraction in July-September, meaning Italy is now officially in a technical recession.
Statistics body Istat says:
The quarter on quarter change is the result of a decrease of value added in agriculture, forestry and fishing as well as in industry and a substantial stability in services.
From the demand side, there is a negative contribution by the domestic component (gross of change in inventories) and a positive one by the net export component.
Eurozone posts 0.2% growth
Newsflash: The eurozone economy grew by 0.2% in the last quarter, as the region continues to post lacklustre growth.
That matches the 0.2% expansion recorded in the third quarter of 2018, and is the joint-weakest growth in four years.
It means that the eurozone has only expanded by 1.2% compared to Q4 2017 -- a weak performance.
The broader European Union expanded by 0.3% in the last quarter, and by 1.5% compared to Q4 2017.
Euro area #GDP +0.2% in Q4 2018, +1.2% compared with Q4 2017: preliminary flash estimate from #Eurostat https://t.co/QcDZWLywYn pic.twitter.com/5SLGmKtnUL
— EU_Eurostat (@EU_Eurostat) January 31, 2019
More to follow....
Updated
It’s not just houses that are catching a Brexit chill.
Overnight, we’re learned that British car production fell to a five-year low in 2018.
The industry is blaming the risk of a no-deal Brexit -- would you invest in new machinery if you feared massive queues at the ports and supply chain disruption within weeks?
Investment in the UK car industry is now down 80 % in 3 years. Increasing paralysis defines the London housing market, spreading to rest of the UK. Inward investment has collapsed. This was called “Project Fear” by Leavers. History will damn their arrogant insouciance.
— Will Hutton (@williamnhutton) January 31, 2019
Updated
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says:
“The uncertainty created by Brexit is largely responsible for the further decline in year-over-year growth in house prices to near-zero, from a broadly stable rate of about 2% in the 18 months before November.”
Here’s our full story on the UK house price slowdown:
Spain’s economy has beaten expectations, giving investors some relief as they await the main eurozone growth figures at 10am UK time.
Spanish GDP rose by 0.7% in the October-December quarter, a little faster than expected. That’s an encouraging sign, a day after France also beat forecasts with 0.3% growth.
EUREKA! #Spain's Q4 #GDP growth equaled 0.7%, higher than expected. YoY growth a very decent 2.4%. #France also beat the GDP growth estimate yesterday. pic.twitter.com/GRuU40MvRJ
— jeroen blokland (@jsblokland) January 31, 2019
#Spain appears to have bucked the trend in Europe by posting a strong 0.7% increase in real #GDP for the 2018 Q4. #economics
— Azad Zangana (@AzadZangana) January 31, 2019
We had been expecting Italian growth figures by now, but I think they might actually be out at 10am.... Will Rome avoid a recession?
Over in the City, shares are rallying on relief that America’s central bank has pledged to be patient before raising interest rates -- a sign that borrowing costs could stay on hold for a while.
The FTSE 100 has gained almost 50 points to its highest level in almost three weeks, while European indices have hit a two-month high.
Connor Campbell of SpreadEx has the details:
Keen to play catch up after spending much of January’s back end in the red, the FTSE continued its month-closing rally on Thursday, the index lifting another 50 points to make eyes at 7000.
It wasn’t just the macro-landscape that gave the index a boost; it also received a helping hand from some of its key components. Shell’s 36% surge in annual profits sent the oil giant 3.5% higher as the session got underway, while Diageo rose 3.7% after getting a sizeable round in, the Guinness and Smirnoff-owner announcing a £660 million share buyback.
The drop in prices since last summer means UK houses are slightly more affordable (or slightly less unaffordable).
But as these charts show, housing is still much more expensive - compared to wages - than 20 years ago, and not much cheaper than before the financial crisis.
Foxtons profits slump 80% in tough market
London estate agents Foxtons - known for its hefty fees and garish minis - is also finding lift tough.
Foxtons has reported that adjusted profits are expected to have plunged by 80% last year -- to just £3m, down from £15m in 2017, with revenues dropping from £118m, to £111m.
Nic Budden, CEO, says last year was one of the worst ever:
“2018 was one of the toughest sales markets we have ever had in London with transactions falling from last year’s historically low levels.
Considering this, we have delivered a solid performance and taken steps to ensure the business is best prepared for these conditions through prudent actions on cost and enhancements to our proposition. We are confident in our model which provides high levels of service to achieve the best results for our customers.
Foxtons has also taken a £16m charge this morning, including £6m to cover the cost of closing branches.
Economist Howard Archer of EY Item Club warns that the housing market will be driven by the Brexit saga this year:
- If the UK ultimately manages to leave the EU with a “deal” at the end of March, we expect UK house prices to eke out a modest gain of 2% over 2019. A likely gradual pick-up in consumers’ real income growth should help the housing market in 2019, while high employment, still low interest rates and a shortage of houses on the market will also likely offer some support
- If the UK leaves the EU at the end of March without an approved Brexit “deal”, house prices could fall by around 5% in 2019 amid heightened uncertainty and weakened economic activity
- If Brexit is delayed, ongoing uncertainty is likely to weigh down on the housing market and could well see house prices stagnate or even fall slightly
Mark Harris, chief executive of mortgage broker SPF Private Clients, also blames economic anxiety for the house price slowdown.
‘Uncertainty seems to be the main issue plaguing the housing market, with potential buyers and sellers sitting on their hands and waiting to see what happens with Brexit.
This means lenders should be offering attractive deals to anyone seeking a mortgage, he adds.
Updated
North London estate agent Jeremy Leaf says the UK housing market is “struggling to weather the Brexit storm but not collapsing”
The average UK house now costs almost £220,000, Nationwide reports, around £5,000 less than last summer.
Good news for first-time buyers, of course.
Introduction: UK house prices stagnate
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Britain’s housing market is feeling the chill from Brexit, with prices stagnating as economic uncertainty builds.
New figures from Nationwide show that prices are only 0.1% higher than a year ago, down from 0.5% annual growth in December.
That’s the lowest annual growth rate since February 2013.
The average house price is now lower than in the summer, even though prices rose 0.3% in January after a sharp fall in December.
It’s another sign that the economy is feeling the pressure, with less than two months until Britain is due to leave the EU.
Robert Gardner, Nationwide’s Chief Economist, says annual house price growth “almost ground to a complete halt in January”.
Gardner blames the “uncertain economic outlook” for dragging the housing market down.
“Indicators of housing market activity, such as the number of property transactions and the number of mortgages approved for house purchase, have remained broadly stable in recent months, but forward-looking indicators had suggested some softening was likely.
“In particular, measures of consumer confidence weakened in December and surveyors reported a further fall in new buyer enquiries towards the end of 2018. While the number of properties coming onto the market also slowed, this doesn’t appear to have been enough to prevent a modest shift in the balance of demand and supply in favour of buyers in recent months.
With a touch of understatement, Gardner adds that the economic outlook remains “unusually uncertain”. Bu he’s hopeful that prices might pick up this year if economic conditions hold up.
If the economy continues to grow at a modest pace, with the unemployment rate and borrowing costs remaining close to current levels, we would expect UK house prices to rise at a low single-digit pace in 2019.”
Reaction to follow....
Also coming up today
Italy might fall into recession this morning! New eurozone GDP figures, due at 10am, may show the euro area’s third-largest member contracted by 0.1% for the second quarter in a row.
The wider eurozone is only expected to have grown by 0.2%.
European stock markets may make gains, following a strong rally on Wall Street last night after the Federal Reserve said it would be patient about raising interest rates again.
Christmas in January! Dovish #Fed drives global risk assets higher. It marked first Fed meeting day in which the S&P 500 rallied since Chair Powell’s tenure began, snapping a streak of 7 straight losses on Fed meeting days, DB says. Bonds rally w/ US 10y at 2.67%. Euro >$1.15. pic.twitter.com/JgfIs5F8pU
— Holger Zschaepitz (@Schuldensuehner) January 31, 2019
The agenda:
- 10am
9amGMT: Italian GDP for Q4 2018
- 10am GMT: Eurozone GDP for Q4 2018
- 1.30pm GMT: US weekly jobless figures
Updated
