> GDP figures for the second quarter in the US (29), Germany (27), Italy (30) and France (29) will give details on the composition of growth in all these countries, providing a better understanding of the current situation. This will be particularly important at this stage of the business cycle, notably because there are fears of recession in Germany and Italy.
> Many surveys on economic activity. IFO in Germany (26), climat des affaires in France (27) and Business confidence in Italy (28). Risk of a weaker index in Germany and in Italy after the political mayhem seen in August.
> Consumer confidence in the UK (30), one month after Boris Johnson has been appointed as prime minister. Consumer confidence in the US (August 27) will bring details on the labor market dynamics at a moment where the situation is changing in the US (Markit index for the manufacturing sector at 49.9 in August) > CPI figures in the Euro Area for August and in the US for July that will bolster central banks in their will to become more and more accommodative.
Growth resumes in the Eurozone. For the EA, it is 0.4% and for Spain 0.7%. Even Italy is recovering and returning to positive territory. France disappoints. Despite strong measures taken on purchasing power, political uncertainty penalizes activity. It could last
The inflation for the Euro Area was at 1.4% in January after 1.6% in December. The main reason for this drop is the negative impact of the oil price. The energy contribution to the inflation rate was 1% in October and just 0.25% in January. This will continue and the contribution will become negative during the first quarter of this year. This reflects that the oil price is currently lower than in 2018 and this will continue allover the year. As the core inflation rate is circa 1%, the headline inflation rate will close but below 1% in 2019.
Except in the US, the mood perceived through all the Markit surveys is negative. In the Euro Area the index is just above 50 at 50.5 but the German index, its main engine, is now in the contracting zone. Japan is converging rapidly to 50. This US will not have the possibility to pull up the global activity. Its momentum is not strong enough. Moreover, this US index has also to be interpreted with the Fed new monetary policy framework. The US central bank has stopped its monetary policy normalization at its January meeting and I can’t imagine that it’s mainly linked with external downgrades. It would be the first time ever that the Fed makes a change in its monetary policy orientation on external elements. I can’t believe that the Fed change is not dependent mainly on the US outlook.
The European Commission has just told Italy to revise its 2019 budget plan: the deficit does not look excessive (2.4%), but the figure is deemed to be fragile as growth projections are overly optimistic….and with a government that emerged from a watershed vote, we should expect a certain degree of laxity on spending to boot. The government was not elected to do the same thing as its predecessors, i.e. there is a risk that the budget will spiral out of control and move above the notorious 3% of GDP threshold, which is incompatible with a stabilization in public debt. Italian public debt stands at close to 132% of GDP, well above the standard 60%, and this is not sustainable. Yet does a sustainable trend automatically involve a drastic cut in the public deficit? Maybe not.
There are a number of points worth raising on the budget/Italy/European Commission issue. Continue reading →
The Italian budget program, which sets out a budget deficit of 2.4% of GDP for 2019, 2020 and 2021, did not go down very well with investors. Uncertainty on Italy is making a comeback and the yield on the 10-year government bond rose sharply as shown by the chart below (as at 15.00pm CET today).
What were last week’s major changes? The main change was in Italy with a strong and rapid drop in the interest spread with Germany.
Why ? Since the new coalition government came to office, fears have emerged on exactly how the campaign-trail program would translate into the forthcoming budget – an answer to this question is expected on September 27.
The government’s stance so far has been to be fairly relaxed, especially on the 3% threshold (of budget deficit as % of GDP), which explains why the yield spread with Germany widened considerably over recent weeks.
This was a source of concern as the Italian economy would soon have run up against financing difficulties due to the reluctance of non-resident investors – who hold around 35% of the country’s debt – to revisit the Italian market after withdrawing their investment in the country all summer. Italians cannot and do not want to leave the euro area, so additional pressure on liquidity and interest rates could have hampered funding for Europe as a whole.
However, the economic situation is swiftly changing in Italy, as economic activity slowed sharply over the summer months, Continue reading →
League chief eclipses senior coalition partner with anti-immigration broadside
Matteo Salvini heads the junior coalition partner in the populist government that took office in Italy on June 1. Yet the leader of the far-right League has seized control of the political agenda — eclipsing the anti-establishment Five Star Movement led by Luigi Di Maio, which won nearly twice as many votes in the March elections but is struggling to project its voice in power.