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Italian growth held back by low wages. The US faces social distress. Weak dollar and stock markets still optimistic

ECONOMIC HANDS FOR JUNE 2025 – Will the Italian economy stumble over tariffs? What structural factors are working in Italy’s favor? Will the PNRR push continue? Will the US economy be hurt by anti-deportation riots? Will tariff negotiations bring real relief? Why are long-term rates rising? Will the dollar’s ​​weakness continue? Are markets too optimistic, ignoring rising geopolitical risks?

Italian growth held back by low wages. The US faces social distress. Weak dollar and stock markets still optimistic

The schooner Italy advances

THEItaly exceeds the Spain? We are referring to economic exploits; it is better not to talk about football ones.

If we look at the most recent data from PMI composite output (services + manufacturing) the Italian system accelerated in May, continuing an upward trend that began in December, while the Spanish one is slowing down, like the Germany, and the France remains in difficulty.

What is behind this positive Italian result? To understand it, it is appropriate to look at the entire first quarter of the new century. A look that brings out a good news.

 The good news is that in these last stormy years the Italian economy has managed to hold its own, rather than sinking as happened in previous crises. Indeed, from 2019 onwards she behaved better of the largest and most praised European partners, such as France and Germany. Even in the most recent quarters and months. Some numbers. For GDP in the first quarter of 2025, Italy recorded a +6,3% on the end of 2019, against the French +4,8% and the paltry German +0,3%. Only Spain did better: +8%. For comparison, in the period 2007-2014, marked by the double recession of 2007-9 and 2011-14, Italy suffered a collapse of 8,9% of GDP, against -6,3% of Spain, +6,1% of Germany and +3,9% of France.

The merit of the business and banking system…

There are two explanations for this. unprecedented behavior. The first is microeconomic and the second is macro. Based on the microeconomic explanation the Italian business and banking system has deeply renovated, gaining efficiency, reducing leverage, innovating, changing the sector mix, increasing the quality of production, focusing more on foreign markets (exporting and internationalizing is an extraordinary training ground), increasing the average size, finally embracing the digital revolution. Much evidence and analysis of such progress is contained in the latest Report of the Bank of Italy, brilliantly summarized by Governor Panetta in the Final Considerations speaking of "signs of vitality" and of "real progress".

…and that of the change in economic policy

This explanation is based on a motorcycle from below, as if it were The city that rises by Boccioni. Therefore, it more or less explicitly attributes the credit to the actors who act in the market (who, however, did not behave so virtuously before). However, it is intertwined with the macro view of the Italian evolution, in three different ways. First of all, the adjustment of the production system was "forced" give her two violent recessions indicated above, who have carried out aharsh selection and pushed companies to look abroad for the demand that had decreased at home. It was not a walk in the park and it is not necessarily a necessary evil (the "expansionary restriction" is a sterile invention), but that is how it went.

Secondly, the increased competitive capacity is observed in two aggregate data linked by a causal relationship: the persistent current account surplus of foreign trade (only the 2022 energy crisis turned the balance red) and the creditor position towards the rest of the world, equal to 15% of GDP. Previously the balance was passive and the net position was debtor for over twenty percentage points. Here too, the not only a cyclical reduction of internal demand (Italians became poorer!) that occurred in those recessions played an important role, decreasing imports and stimulating exports.

Thirdly, the Political Economics played a crucial role in determining the different performance between then and now. Then it was fiercely restrictive, not only in the public budget but also in the transmission of monetary policy, due to the very violent credit crunch. This explains both the loss of GDP and the poor result in lowering public debt/GDP (it rose by more than 31 percentage points between 2007 and 2014). Between 2020 and 2022, economic policy was rightly expansionary and this has not only supported growth, defended production capacity and increased confidence, but kept the increase in debt/GDP low (+1,8 points) in itself and compared to what happened in the other major euro countries. Which means that the higher deficits have given a boost to GDP without destabilizing public accounts.

Fiscal tightening has halted the race

If we break down the trend of the last five years into two sub-periods we can see how the best performance phase of the Italian economy falls in 2019-22 and is coincided with the widespread use of public support (super building bonuses, incentives for businesses for 4.0, various types of compensation) which have generated a strong increase in gross fixed investment. In the following three years (using IMF forecasts for 2025) Italian GDP is returned to marching at his usual pace, which is not fast. While the Spanish one has the fast foot of Achilles. The Italian step stands out only because Germany is suffering from the car crisis and the masochistic setting of public finances, now thrown away by the new parliament.

It is difficult not to see in the normalization of Italian growth the effects of tightening the strings of public finances, whose structural primary balance goes from -4,8% of GDP in 2023 to +0,2% in 2025, mainly due to the substantial abolition of construction super bonuses (which however does not have the negative impact of the pension cuts implemented in 2012-13).

Among the issues to be resolved are low real wages

What is preventing Italy, which a well-known local bard sings of as the world champion of manufacturing exports, from taking flight and find the lost thread of growth for some decades now? In the Final Considerations Panetta indicates some key factors of ancient origin: low education (but businesses demand it), territorial dualism, fragmentation of the productive fabric (=businesses that are too small: a question of poor entrepreneurial governance) and the burden of public debt.

Another one can be added, also mentioned by the Governor, in the contractual system that keeps real wages in check, preventing consumption from contributing to growth. In 2024, the gross wages per employee net of the increase in prices (household consumption deflator) were 5% lower in 2000, while they were 4% higher in Spain, 14% in Germany and 20% in France. In the last period, that of the best Italian performance, they fell while they remained unchanged in Germany, dropped a little in France and rose in Spain. There are composition factors: more employed in less paid jobs that lower the average. However, isolating themanufacturing industry in 2019-24, a decline in wage purchasing power similar to that of the entire economy is observed.

It is said that to increase wages you need to increase the productivity, and that this depends on innovation, therefore on companies. The causal link can then be reversed: to increase productivity, wages must be increased, so as to force companies to innovate; it would be a more powerful incentive than public subsidies.

One can console oneself by saying that one thing happened. trade-off between wages and employment, which has increased and is increasing like never before; but also the real wage bill it fared worse than other European countries in the golden age of Italian growth, and even worse than GDP (while elsewhere it did better). Then let's not be surprised if the best forces of the country seek more rewarding opportunities abroad, thus contributing to the reduction of potential GDP.

Duties? What duties?

Looking at the wider world, the “trade war” (unfortunately there are many other wars going on…). Duties, which duties? The hard and raw numbers, different from the opinions that continue to indicate uncertainty (although less than before) and mistrust (although to a lesser degree) make one think that the US economy, and consequently its partners, are making a mockery of duties. In fact, if Trump's duties were a person we could organize an extraordinary episode of the television program Who has seen? Not so much and not only because in the magic mirror of statistics there is no trace of reflections of the duties themselves (as happens with vampires), but also because in the federal budget itself one sees only a timid relief in the form of more revenue.

A contained revenue

“We're making a fortune with tariffs – $2bn a day”, billions and billions and billions. With his Scrooge McDuck language (the original name, scrooge, would be more appropriate), President Trump boasted the prodigious effects for the federal coffers of the major duties he introduced. Two billion a day makes over seven hundred billion a year: a nice relief for a budget that is heavily in deficit and will be even more so because of the budget being approved by the Senate. However, according to some calculations, in May, the first month of full force of the new import tax, 23 billion were collected, which means about 280 billion a year, with an increase of 190 on 2024. Certainly the advance of imports, the embargo de facto with China and the postponement of companies in delivering goods to wait for the definitive duties have influenced the data. But the most reliable estimates say that the final yield will not be much different, and equal to less than 1% of consumer spending. Which would explain the so far “invisibility” of the effects of tariffs on macro variables. The effects will start to be seen especially in the second half of the year.

The global economic situation is collapsing

Invisibility of duties or not, the data of global orders and production they folded down in spring.

The picture remains varied across sectors and countries. manufacturing It is the one that is most affected by the duties, being hit by them. Services, instead, suffer from theincrease in uncertainty which causes families and businesses to postpone spending plans. Consumers, then, tend not to want to go to the United States on vacation, in addition to preferring everything that is not Made in the USA. It is premature to draw conclusions, we have learned. But the confusion remains great and hinders the progress of the economic system.

Inflation towards the fateful 2%

From gallop to trot and now almost to walk. The inflation colt is obeying the tight reins of restrictive monetary policies. But also the gradual exhaustion of the wage chase to the past increases in the cost of living. On an annual basis, the dynamics of core consumer prices, that is, excluding energy and food products (subject to extra-economic factors and in any case more volatile), fell further in May in the USA, the Eurozone and Italy.

The trend in the United States, where there is no trace of a tariff effect (see above for an explanation). Indeed, the annualized three-month dynamic has cooled considerably: 1,7% in May, the lowest since July 2024, versus 3,8% last January. Nor is there any sign in consumer prices of the still significant increase in American wages: +3,9% on an annual basis in May, +4,3% with the same occupational composition, +3,8% the annualized quarterly variation. On the other hand, the labor market remains tight. There is not even evidence so far of those sharp increases in costs passed on to customers, with increases at their highest levels in two years, reported by business surveys. The impression is that there is a time lag between official surveys and company declarations.

Also in theEurozone the wages offered have stopped slowing down: +2,9% annual growth in April, as in the previous two months. Only in Italy annual growth fell to 1,6% from 3,0% in December, but the ISTAT survey on the labor market in the first quarter of 2025 gives +4,1% on the same period in 2024. Something doesn't add up.

On the other hand, global purchasing managers report that a recovery is underway a new acceleration of the prices paid and made to be paid, on values ​​that have not been seen for two years and which are clearly higher than the pre-pandemic rates. The oil price increase pours fuel on this outbreak, even though it was mainly caused by the Israeli blitz on Iran. In short, inflation is falling calmly and the consequences of the higher duties will be seen later.

Rates diverge

There are descents and smells of decreases in the key rates of the Central Banks (even that one Russian has loosened monetary policy, although its rate has only risen from 21 to 20 percent… – and that Indiana has launched a reduction of half a point…). The ECB cut rates, as expected, but left doubts over future declines. Fed, which meets next week, will likely leave rates at their current level, despite Trump's heavy and intrusive (not to say obsessive) remonstrances. But By the end of the summer, the Fed could join the declines around the world. Effectively, economies in slowdown – as certified by the International Monetary Fund and the World Bank – seem to justify monetary easing (except in the United States, where – see the reflections on the 'Fed dilemma' in the May “Lancette” – the pressures of tariffs on prices – delayed but still on the horizon – invite caution). So, why long term rates – dominated in normal times by the markets and not by the Central Banks – they show no signs of descents, on the contrary...?

It was February 6 of this year and the Secretary of the Treasury Besent, in an interview with Fox News, said that, sure, President Trump wants lower rates, but he will not ask the Fed to lower them (!!??). More importantly, he said that both he and the President were “intensely focused” on the rate T-Bond at 10 years. This is understandable, given that this rate is crucial for financing the public deficit. Bessent clearly hoped that this rate would decrease: on the one hand, the Musk and DOGE's magic wand would have reduced public spending, while, on the other hand, the great recovery of the American economy – the boom that Trump had repeatedly announced – would have increased tax revenues, despite those tax cuts that, according to Our Man, were self-financing. A well-tempered T-Bond, in short, could only go down and thus facilitate the financing of the deficit. Well, then (February 6) the yield of the T Bond was equal to 4.43%. For a while, it seemed to work and in early April, before the first salvo in the trade war, the return had dropped to 4%. But then it went back up in May, up to 4,58%. Today, thanks to the cold inflation of May, we are back down to 4,42%, far, in any case, from that level which would allow us to avoid the deficit-interest-debt spiral, and far from the level the economy needs (the real rate is higher than the US GDP growth rate). And what's worse, the T-Bond at 30 years (see chart), which is concerned with the long term, had a yield, on February 6, of 4,64% – today we are at 4,90%, but it had also surpassed, a few weeks ago, the 5% threshold. What Bessent & Co. struggle to understand is that it is not enough to 'focus' on the yield of T-Bonds – this is determined by the markets, not by the powerful of the Earth. And the markets have clearly given the thumb up to the Trump Administration's budget policy.

We have said many times that what hurts the real economy is above all uncertainty. “Irreducible uncertainty” Keynes called it, framing a key feature of the modus operandi of the market economy. But there is uncertainty and uncertainty. And the one that Trump & Co. have injected into the gears of the economy really puts a spoke in the wheels, forcing postponing spending decisions and undermining confidence. And, if this is true for the real economy, it is also true for the financial economy. TheOBBBBA (One Big Beautiful Bill Act – yes, it seems incredible, but that's the official name) under discussion in Congress guarantees a large increase in the deficit and debt public, both already at very high starting levels. It is understandable that those who have to finance the American Government are concerned. Already the three major agencies rating (S&P, Moody's, Fitch) They took away the Triple A from the USA. The interesting thing is that there are 15 of the 50 American states that retain the Triple A; so, if you don't trust the T-Bonds, you can buy the bonds of theIdaho (the largest producer of potatoes among all the American states) – and there are also two private companies with the Tripla A: Microsoft and Johnson & Johnson. The 30-year T-Bond, flirting with 5% yields, is the emblem of uncertainty which weighs on the decisions of investors, both institutional and non-institutional.

In the Eurozone, as mentioned, the ECB has taken another step along the path of declining rates. Of course, as central bankers say in uncertain times, the next move will depend on economic data. Which data, as far as the other two paths – that of prices and that of the real economy – seem to suggest that there is room for further easingThe ECB does not have to worry about the effects of duties on prices, even if the EU were to impose retaliatory duties on imports from America. And in any case, the strength of the euro – or, better said, the weakness of the dollar – is in itself a tightening of monetary conditions in the Eurozone, a tightening that must be taken into account when weighing the pros and cons of another cut in the ECB's key rates.

Worthy of note is the return of the Italian spread in the 'Draghi area', towards quota ninety: those were the happy days of the February 2021, when a flash of enthusiasm for the arrival of Mario Draghi at the helm of the Government had caused the gap between the yields of the Bund and those of the BTP to collapse. As we know, the enthusiasm did not last long, and the slow wearing down of the Draghi Government, by a political body that did not tolerate technical governments well, brought the spread to over 200 points in the space of twenty months. It must be recognized that we came back down from those peaks, thanks to the prudent management of public finances by Giorgetti-Meloni.

In times of 'Sell America', and migration of investments towards the remaining AAA stocks, such as German bund, the latter should have benefited from it, if it were not for the fact that Germany announced a looser budget policy and 'debt brake' removed which was written into the Constitution. The two factors offset each other, and overall 10-year Bund yields changed little. However, the BTp spreads are our merit and not the fault of others, as demonstrated by the fact that spreads have also fallen compared to OAT French and to passes Spanish (see graph).

As regards the you change, the declining phase of the continues dollar, which dates back more or less to the beginning of Trump's offensive on tariffs, proving that 'the wisdom of crowds' realizes that that Trump's pursuit of a reduction in US trade deficits requires a weaker dollar. Duties make more noise and damage than anything else: the hard work is done by the exchange rate of the greenback. From the recent highs of appreciation (autumn 2022, when the dollar had broken parity with the euro) The US currency weakened by almost 20% against the euro compared to the lows of that time. Will it continue to weaken? If the goal – by 'goal' we do not mean a conscious pursuit, but rather the 'slippery slope' of reality – is to make the dollar more competitive, the answer is: yes. Compared to the fall of 2022, and looking not so much at the euro but at the complex of exchange rates against 41 currencies, the Bank for International Settlements estimates that the weakening of the dollar, both for the effective exchange both nominal and real (which takes into account inflation differentials), was limited to only around 4%. In short, the dollar is still too strong for its own good.

La chinese coin has instead remained – or, better said, has been maintained – fairly stable against the dollar. In the 'paso doble' between China and the United States in the negotiations on tariffs, there is no need to complicate things with the weapon of exchange rates (there are already enough weapons on the table). But this means that the weakness of the greenback against the euro has transferred to big competitiveness/price gains for Chinese producers compared to Eurozone producers (see the exchange rate Yuan/Euro in the graph). Which certainly does not please the latter, who already have to compete with a China that is looking for other outlets for those products that are absorbed to a lesser extent by the US market.

I stock markets, which seemed to maintain their recent optimism, despite the balance of risks being on the downside, must now deal with geopolitical risks further increased by the armed confrontation Israel-Iran, which adds to Israel-Gaza, Russia-Ukraine, Pakistan-India, and assorted tensions elsewhere around the globe. The balance of risks is even more unbalanced, especially in America, where is the internal geopolitical risk – see the Marines in California and protests in other cities – adds to the uncertainties mentioned above.

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