Italian economy in March: employment drives GDP and the drop in inflation helps consumers

THE CLOCKS OF THE ECONOMY OF JUNE 2024 – What factors are behind the stability of the Italian economy? Why is growth virtuous? Is export gaining market share? Is the quality of exported goods increasing? Is GDP more dynamic than it seems? Why is inflation in Italy lower than the Eurozone average? Are there cracks in the American economy? Will the reduction in ECB rates be followed by further declines? Why did government bond yields rise instead? What effects will the result of the European elections have on the euro?

Italian economy in March: employment drives GDP and the drop in inflation helps consumers

The Italian economy is going

The French are pissed and his balls are still spinning. Paolo Conte sings. We're not talking about the election results, which also express anger and give another boost to the ball rolling. But of "overtaking", of the reversal of positions in that special race, similar to the Giro d'Italia or the Tour in terms of effort and imagination, which is the performance of economies: I'Italy in Europe it is no longer the last and perennial follower, but has jumped to the top, with France and Germany struggling. This is confirmed by the data from the last first quarter, and the increase in activity over the first quarter of 2019 is 4,4%, compared to the French 3,4% and the German 0,6%.

He's in the second trimester continuing his lead race, as the component illustrates PMI output. Even though Italy was also suffering in manufacturing sector, which as elsewhere is affected by monetary restrictions and energy and geopolitical shocks. And of car crisis German and French. A crisis that is structural because France and Germany have inflicted themselves and have inflicted on us (to atone for the dieselgate) the passage to forced stages to the electric car, throwing away 130 years of diesel engine history and handing us over to Chinese companies, the undisputed leaders.

The Italian economy is going even better than what the official statistics say. Two other readings suggest this. The first is the components of GDP. In fact, depending on how we observe them (a bit like beauty in the eye of the beholder) they reveal a better or worse trend, and in the case of first quarter of 2024 the worst one is in the simple GDP data and the best one is in the final sales, i.e. of GDP net of changes in inventories; this different point of view makes us go from +0,3% to +1,0% compared to the previous quarter and from +0,7% to +2,7% compared to a year earlier. It's mouth-watering, considering that final sales say how things go demand for Italian productions. Domestic and international demand. And compared to the international one, theItalian export increases more than the reference markets, gaining shares, also because it is exploiting nearshoring e friendshoring which are reshaping globalisation, together with protectionist blows.

The second reading is that ofoccupation, where is the pace of expansion of people who have a job continues to be very brilliant, even more than that of the prodigious one job machine American, and more than the GDP. So we have to ask ourselves the question: are the entrepreneurs so stupid that they hire so many people to produce so little or is it the method measurement of GDP that emits a cracked sound, because it is cracked compared to the changes that have occurred and are underway in the economic reality? We lean towards the second hypothesis and confidently await the upward revision of GDP in the years to come.

There's a'more nonsense which continues to circulate everywhere: the superbonus it was just a disaster and did not give any advantage to the country, benefiting the few usual suspects (owners of castles and similar nonsense). Luckily this one granitic certainty has begun to crack (see latest releases from the Bank of Italy) and go in the direction indicated several times by Lancet: without theupward explosion of investments in housing, worthy of the national GIMBO, the increase in Italian GDP would have remained the dull and sad one known in the past. AND the explosion of those investments is daughter of the superbonus, because the low rates had been there for some time and had not led to similar results.

Don't think it's just a question of construction, because when these go everything goes (the French are right in this) and the economy becomes stronger as a whole. So much so that the Italian potential growth it has been revised upwards, to 1%, from the 0,1% estimated not so long ago.

Therefore, with Paolo Conte, and remembering Domenico Modugno, we could conclude: «Among the newspapers that flutter/There is a bit of wind and the countryside barks/There is a moon at the bottom of the blue». No blue: light blue! Like that of the Italian multi-ethnic and multi-coloured athletes who won medals at the Roman European Athletics Championships.

As will continue in the coming quarters beautiful fairy tale of the ugly Italian duckling who turned out to be a swan? Since we know that Italy remains one small ship in the great and stormy global ocean, to understand how it will go, let's look up fromnationalistic navel and we turn it to the rest of the world. Where the recovery accelerated further the pace, both in production and in orders, according to the most recent PMI data.

- orders are also rising from abroad, proven proof that the international broadcast of the expansionary impulses works, despite the protectionist headwind. This will give back momentum in manufacturing, which it is the master and commander of goods exchanged between countries. So in the second half of the year the draft of construction, weakened by the legislative about-faces on the superbonus (in contempt of the most basic respect for taxpayers), that of the transformative industry will be replaced. There is a risk on the horizon: that the "bad sense” of the right-thinking people who have regained their courage and are asking for reduce the public deficit here and now. The suffering and losses inflicted by the sovereign debt crisis were not enough for him, just as the blood of a hundred virgins is not enough for vampires. Go back, Dracula!

Inflation is in retreat

When the analysis proves correct, and it doesn't always happen, the predictions are spot on. It's happening forinflation on both sides of the Atlantic: from there, where it seemed more reluctant to descend, it began to descend again; from here, where it seemed to have already ended up in the attic, it has appeared again.

The difference in levels and dynamics, as told by the Lancet, it's in wage adjustment mechanisms: they are more ready and in direct contact with the conditions of the labor market in the USA; delayed and linked to collective bargaining institutions in the Euroarea. This has strengths and weaknesses, the former being pro-cyclical and the latter anti-cyclical. In any case, the invitation is from observe the gears of those mechanisms to try to understand what will happen.

In United States the job market is cooling, despite the jump in employment and hourly wages in May. The relationship between unemployment and rate of places vacancy of work has returned to the values ​​before the pandemic. And looking beyond the monthly figures, new jobs and salary dynamics are slowing down.

In 'Euro area wages must recover purchasing power again, as established by the national sector contracts. A case in point is that ofItaly, where the established rules provide for timely verification of the gap between the inflation that had been predicted by ISTAT and incorporated into the salary increases paid and that which actually occurred. ISTAT itself has recently published the deviations for 2023, which are wider the further back in time the prediction was made.

Thus, the contracts that were signed in 2020 and 2021 must make workers “make up” more than five percentage points for the gap between inflation forecast and reality in the past year. Those closed in 2022 just over four points. Just 0,3 points for contracts signed in 2023 itself. The overall effect on labor costs will depend on many elements that it would be too long and tedious to describe here. But this example is enough to make it clear that it exists in Europe a long echo of past inflation.

What is certain, in any case, is that the decline in inflation will come to fruition, bringing it back to the fence around 2% which, by convention, decrees monetary stability. Even more so since raw material they continue to be overall calm.

Of course, in the long run deglobalization and protectionism do not help. And equally certainly the era of threatening deflation it's behind us.

Rates down and stock markets up and down

For the first time since time immemorial the ECB – and the Canadian Central Bank – have anticipated the Fed. The - modest - reduction in the ECB's key rate does not change the situation much restrictive posture of monetary policy and is accompanied continuously drying up of liquidity from failure to renew public bonds held by the ECB and gradually expiring. The lack of reinvestment continues at the rate of 7,5 billion euros per month, and at the end of 2024 there will no longer be any reinvestment: all maturing securities (there are thousands of billions of euros, spread over time) will not be renewed.

And the Fed? How's the liquidity pumping via non-reinvestment of securities going in your belly? At the peak in April 2022, there were $9 trillion (up from $4 trillion in February 2020), and by early June 2024 there were fell by 1,7 trillion, to 7,3. It is unlikely that they will ever go to zero.

Since the beginning of the year, and despite the very recent reduction in ECB rates, i yields on long government bonds they have been rising, both in America and in Europe, albeit with a fluctuating trend marked by the changing forecasts on the Fed's rates: how many reductions would the American Central Bank have implemented in 2024? We started with 4, then 3, then 2, now only one and it's not clear when. Or maybe there will be more, and in case of doubt, investors are once again stocking up on bonds. In short, the Fed is in no hurry, and plays on the fact that the economy doesn't give up anyway, and as long as it's going, why remove the brake? Inflation is falling, the Fed acknowledges, and the data from the other day confirm this: while in the previous FOMC meeting the statement lamented the lack of progress in the fight against inflation, now it speaks of some "further modest progress". In any case, Powell & Co., like Quinto Fabio Massimo, they stall: They want to make sure that the trajectory of falling inflation is confirmed. And in 2025? The Fed's 'dot plot', which describes the forecasts of individual FOMC members on future Federal Funds, sees four declines in 2025 and four more in 2026, to a total of two percentage points. If the data, also to come, will not recommend otherwise.

In short, on both sides of the 'pond' (the pond, as the Americans call the Atlantic) the Central Banks they navigate by sight. The famous guidance, the guide for future monetary policy measures has given way to a different scheme: "it depends on the data". Lagarde, in a recent interview, explicitly said that there cannot be guidance when there is too much uncertainty around. But in the meantime, uncertainty can create problems for countries blamed for 'excessive deficit. Italy is at the forefront of the list of 'culprits', but it must be said that it is in good company: Half the Eurozone will find itself under fire for 'excessive deficit'. When a rule is widely disregarded, it means that the problem lies not in those who violate it, but in the rule itself. European Commissioner Paolo Gentiloni said, regarding Eurobonds and the need for European defense, that reality will push towards new common debt. And perhaps the famous 'reality' will also take charge of review inappropriate rules to the facts.

Regarding the excessive deficit procedure, there are those who worry that the famous safety net that was put in place two years ago (July 2022) – the “Transmission Protection Instrument”, TPI - and which was supposed to protect the countries under attack by the markets, will not be able to work now that Italy and the other defendants will be put under accusation: the TPI stipulated that the help would only come in favor of the countries that had observed the rules . Fortunately, Lagarde clarified that the countries under procedure have not (yet) broken the rules (we will see at the end of the trial...) and in the meantime the ICC will be ready and fast.

Strange and funny story that of 'emergency' measures, like the 2020 PEEP (Pandemic Emergency Purchase Program) and the ICTY. How are these measures 'cooked'? Sometimes, in the kitchen. For PEEP, he tells the story again Lagarde: «It was a telephone meeting that I chaired from my kitchen, and it reached me Fabio Panetta, who lived nearby and brought some sweets, because he thought the matter would take a long time; and we finished them at four in the morning." For the TPI, the genesis was equally adventurous: «I was in London for a different meeting, and there was no reception in the hotel room. I asked if I could go down to the lounge, but the staff said there was a meeting. I need privacy, I said, and I ended up connecting with my colleagues in a room underground, semi-dark and without windows, where they had installed a monitor."  

Central bankers do their best extinguish fires that arise in the economic-social system. But they can do little when they are set by the voters themselves. The impact had by European elections it is there for all to see on the markets and has, in general, been negative, given the advance of Eurosceptic forces; as happens in these cases, it is the earthenware vases that suffer. Italy – which doesn't deserve that reputation, but it is a reputation that is difficult to eradicate – has seen it spread rise, both compared to Bunds and Bonos (see graph). But the movements were all in all modest. While another spread has widened a lot: the one between French titles and German stocks, given the electoral disaster of Macron's party and the surprising decision to go to elections. And with this, there are twosurprising decisions to dissolve parliament early. That of the English Prime Minister Rishi sunak was defined by the Economist: “either a stroke of genius or an act of madness”, and the Economist itself favors the second option. The one of Macron it is a bet, and the outcome of this bet will shake the markets again.

Sui exchange rates the impact of the elections was initially negative for the euro: from 1,09 against the dollar on 3 June, after the announcement of the election, it fell towards 1,075. all in all, it remains, as already observed in the past by Lancet, in fork 1,05-1,10 where he has been established since the beginning of the year. The graph, which does not take into account the daily convulsions, signals relative stability in the currency markets.

Looking beyond, the dollar it could strengthen further in the short term. Short-term capital flows favor the greenback. You don't need to be a financial genius to understand that short-term rates close to 5%, while they last, are very attractive... And they are around in America corporate bonds of quality with a maturity of 5-10-20 years and returns between 5% and 8%... Given the forecasts of falling rates, investments for those maturities are also attractive for savers. Further in time, the trend of the dollar depends a lot on the badger dance of the ECB and the Fed. The ECB, unlike the Fed, does not provide any 'dot plot' and did not want to be tied to promises/forecasts of further cuts. And then there is geopolitics…

I stock markets they don't seem at all bothered by the dance of rates but the political unknowns weigh heavily, as seen in the last week. 'This or that, for me they are equal...', they seem to say. Since the start of the year they broke records. Compared to January 1st, despite temporary stumbles, the S&P 550 gained 14,6%, the Eurostoxx 13%, the Nikkei 16% and, in our small way, the Mib recorded a +22%. The economy has held up, on both sides of the pond, to the increase in the cost of money. This increase – as we already knew – has two dimensions: on the one hand, it is negative for investments and installment sales; on the other hand, it is positive for savers, who see more interest flowing into their wallets. Textbooks have always recognized this duality, but have always said that the negative effects outweigh the positive ones. Perhaps, with the increase in financial wealth, the positive part has cushioned the negative impact…