Comments on Italian Elections

Three immediate comments
1 – The outcome is clearly in favor of populism with the 5S movement at 34%, Lega (former Northern League) at 16% and Brothers of Italy at 4%.
2 – Democratic parties that used to govern in the past are out of the picture. Forza Italia (Silvio Berlusconi) was expected to be above Lega. It is below with 14%. The Democrat Party of Matteo Renzi is below 20% at 18%
3 – There is no majority

There is a jump for populist parties and that’s what we must keep in mind. This can be explained by low economic prospects, aging population and the refugees’ crisis. The risk therefore is to try to change institutions and notably the relationships with Europe. We know that some contenders from the 5S movement and for Lega were in favor of an exit from the Euro Area.

What could happen? Continue reading

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

A lower momentum for the Euro Area during the second quarter

GDP growth for the Euro Area was confirmed at 0.3% (flat) for the second quarter of this year (2.2% at annual rate).
The table below shows growth figures for different countries of the Euro Area.
In the largest Eurozone countries there is a slowdown during the second quarter. This is the case for Germany (from 2.9% to 1.7%), for France (+2.7% to -0.2%) for Spain (from 3.1% to 2.8%) and for Italy (from 1.1% to 0%) Growth is stronger in other countries.
Carry over for 2016 at the end of the second quarter is 1.3% for the Euro Area but 1.5% for Germany and 2.6% for Spain; but just 1.1% for France and 0.6%% in Italy. For other countries it is circa 1% except for Greece where it is still negative. Continue reading

Landmarks on Euro area growth in the first quarter

Growth figures in the Euro Area have been pretty good during the first quarter. The trend has dramatically accelerated in Spain, France is out of a long period of very low momentum and Italy is out of its recession.

Nevertheless, even with these good news, it is too early to be sure that the long stagnation that has characterized the Euro Area since the first quarter of 2011 is over. Austerity policies that were put in place at this moment have provoked a long recession in the Euro Area. The exit from this episode may start in 2015 with the new ECB monetary policy that focus on demand. 4 years to exit from the negative impact of these austerity policies that imagined that reduction in demand could imply a strong growth momentum (sic)
The current economic policy put demand at the front place to try to change the business cycle profile. I think that this is the best recipe to converge to a more virtuous business cycle.

This post wants to show the economic activity profile in the Euro Area and its main countries at the end of the first quarter. I do not give details of on composition of growth because usually only the GDP number has been published.

GDP Quarterly change
This graph shows the GDP quarterly change at annual rate. The red bar for the first quarter of 2015 shows strong performance in Spain, France and Italy. The German number is below expectations. Continue reading

Four Graphs on the Euro Area Growth Momentum

Euro Area GDP was almost stable during the second quarter (+0.2% at annual rate) after a slight increase of 0.8% during the first three months of this year. Compared to the second quarter of 2013, GDP is up by 0.7%. Carry-over growth for 2014 is 0.6% at mid-year (Carry-over growth at the end of the second quarter is the average annual growth if GDP level remains at Q2 level in the third and the fourth quarters. It’s a useful approximation)

The first chart shows GDP level at constant price. The red line is the trend calculated from 2000 to the first quarter of 2008 and prolonged until the second quarter of 2014. The gap between the observed GDP and the trend is -12% at the end of the first half of 2014. This is huge and we do not see any convergence between the two lines. It is more a divergence than a convergence. The line in blue is another trend that shows the momentum of the recovery in 2009 and 2010 and the break after the first three months of 2011. There is gain a divergence here. Since the first quarter of 2011, GDP is down by -0.36% (-0.1% at annual rate). The current recovery seen since the first quarter of 2013 is following a mild dynamics. From that date, average growth is 0.8% at annual rate. It is still far from the 1.9% which was the trend growth rate seen before the crisis. 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