The Italian Malaise

Matteo Renzi has well and truly lost the referendum that took place on December 4.

Turnout was very high at 70%, and the referendum showed a considerable difference in the number of voters for the no and yes camps. The no campaign clearly won a clear majority with 59.1% of votes vs. 40.9% for voters in favor of constitutional reform, so it is certainly not a close call that fails to garner attention.

However, the markets’ reaction was not extreme. The euro fell below the 1.06 mark against the dollar, while the equity markets in Asia saw only on a moderate drop, with Tokyo closing down 0.8%. Yields on Italian bonds rose, wiping out the drop seen at the end of the week.
Investors are adopting something of a wait-and-see attitude, which is reassuring in one sense as there is no major backlash following the result. But the whole affair is far from over.

Matteo Renzi will present his resignation, which will very probably be accepted, and in the meantime, the current government can no longer operate effectively following yesterday’s result.
Italian president Sergio Matarella will have to consult and appoint a new prime minister to form a new government, and this could be Matteo Renzi. This whole process will take several weeks.

We would raise a number of points: Continue reading

Italy’s momentum in 5 charts

Italy is in recession. For the second quarter in a row its GDP level dropped. It decreased by -0.4% at annual rate in the first quarter and by -0.8% during spring. Carry over growth is now negative at -0.3%. To have a flat GDP growth on average for 2014, GDP has to grow by 1.4% for the third and for the fourth quarter. GDP growth will probably be negative for the whole year.
The first chart shows the Italian GDP from 2000 to the second quarter of 2014. It’s the GDP level (purple line) at constant price. I have calculated a trend (in red) from 2000 to 2008. It represents the GDP momentum before the crisis. Continue reading

Good News in the Euro Area may come from the South now

In Spain the synthetic index for the PMI/Markit survey shows stabilization in the manufacturing sector. In Italy the trend is upward but does not converge yet to stabilization (49.1 for the index). This can be seen on Chart 1.
In Spain the index is at 50 showing a stable activity for the first time since April 2011. The really good news is that the impulse comes from the New Export Orders index which jumped to 54.9 in June. It’s a very important first step for global economic stabilization in Spain
In Italy the main catalyst was production and if the New Export Orders remains above 50 (52.2) there is no spike comparable to Spain’s.

This is the first step for a renewal in the South