REAL INDICATORS - "Viva Italy, Italy that resists…»: the beautiful song by Francesco De Gregori is “millesimata” 1979. Re-sung with Lucio Dalla on May 1 2011, is still relevant.
Indeed, ten years later, in the wake of the pandemic, Italy is resisting the headwinds of Covid better than other countries and the recovery is from fast lane.
Recalling another masterpiece, this time cinematic and branded 1962, in full economic miracle. In his inaugural address Government, Dragons he evoked that miracle, urging him to recover the spirit that animated him. Although the cloths of the Gassman braggart they definitely don't suit him.
Recovering from the blows of the crisis, in 2021 Italy also allowed itself, and passant, to win Eurovision, European football, volleyball (men's and women's) and even American football, as well as reaping a host of medals at the Olympics (such as Berruti in Rome in 1960) and the Paganini Competition for violin in Genoa ( it hadn't happened for twenty years), to finally pin another medal on his chest: a Nobel prize in physics. But what does sporting and cultural feats have to do with the economy?
They have something to do with it. The modus operandi of an economic system is growth, there is a spontaneous tendency to grow, driven by the desire for a better future and by innovation, not just technological. But that desire it feeds on trust, of believing in oneself, and this creed has disappeared in recent decades, which have seen the discouragement of the Italian economy. The conditions now exist for sustainably raising the actual and potential growth rate and confidence is at an all-time high.
The concept of potential growth – that is, a growth rate that does not create problems of inflation or sustainability – is theoretical (“no one knows where it is”). Statistically it is closely linked to actual growth. If this continues at a high pace, economists are forced to say to themselves: “but then it's possible!”, and they hasten to revise their estimates of potential growth upwards.
Also because, in the meantime, that higher growth has generated more investments in production capacity and in capital deepening (which generates increased productivity) and the usual inclusion more people in employmentby activating the learning by doing (learning by doing that motivates and improves life; more fuel for productivity).
Moving from grammar to practice, all this will depend on whether and how the money of the PNRR will be spent, well baptized Italy tomorrow. The PNRR has been boosted by another 105 billion from Italian and European funds.
This extraordinary renovation (a sort of EU superbonus) has been calibrated not only on removing the obstacles that have so far clipped the wings (so to speak) of the Italian economy, but also on guiding the country towards global megatrends. If this deforestation of snares and snares manages to make the "law of doing" prevail and if the megatrends are followed, the momentum of the Italian economy will continue for a long time.
Even outside of Italy, the recovery continues. A little dented but still alive in Europe (due to difficulties of the German car). With more headway in USA, where the fight against the virus is now much better than in the Old Continent.
In China the economy is instead in sharp slowdown: last month the IMF gave growth rates of 8% for this year and 5,6% for the next. Figures that will be lowered, under the conjunction of three factors. First, theinjected uncertainty in the economy by President Xi's crusades against unjust enrichment and the excessive power of the big Chinese technology companies. There common prosperity that Xi wants is commendable, but the hand is heavy.
According to the government dictates on the closure of factories and mines, dictated by concerns about air pollution. Third, the tightening of restrizioni in direct contact with the 'Covid-zero' policy pursued by the authorities (whether this policy is correct is another matter). However, despite the slowdown, China will continue to be the largest contributor to global growth.
Going back to Italy and to Francesco De Gregori, what about the «Italy working»? In the third quarter, the Italian GDP recorded +3,8% on the previous year, while employment recorded +1,2%. The difference is even greater if we look at the first three quarters of the year: employment at a standstill, GDP +6,3%.
Those who are satisfied will say that if we produce 6% more with the same work, it means that the productivity – the economy's bete noire for many years – has made a big leap forward. But it would be premature to draw these conclusions, given the crisis-induced shuffle in goods, services and labor markets.
In fact, the hours worked for busy they are still a couple of points per employee below pre-pandemic levels. What we can say is that employment has room to grow and there are no signs of price/wage spirals.
INFLATION – «There is, there isn't. There is, there is not…” The dilemma on the existence of inflation it recalls the doubts of the lover who questions the daisy about the correspondence of affectionate and warm feelings from the one he/she has fallen madly in love with.
Many analysts and economists, even well known and certainly not hawkish (from Lawrence Summers to Mohamed El-Erian), announce the imminent price fire. On the other hand, central bankers deny that there is sufficient evidence that the fire is about to break out. St. Augustine reminds us that there is no present, but la vision, i.e. the present of the present tense.
Such vision resembles what is seen through a kaleidoscope. Now let's look at the rising cost of raw material and semi-finished products.
Accompanied by record spread of price increases by firms, which in manufacturing are about two-thirds within the supply chains and therefore supply non-final goods.
Let's take the optical instrument for a spin and the calm chaos of the CLUP, i.e. the cost of labor per unit of product, which plays the same role in the formation of price lists as that «love that moves the sun and the other stars».
In fact, without wage contagion, related to the dynamics of productivity, the flame of the cost of living goes out like fire when there is a lack of oxygen. It shuts down both on the demand side, because purchasing power decreases, and on the supply side, because the mark-up is applied to a total that increases less if it increases.
Another round, and here it appears the unbridled race of price indices to production and consumption. One more turn and the flattening EEG appears market expectations financial, revealed by bond yields.
We will know the truth only at the end of the story. On the front of who thinks that inflation is temporary (but how long the temporariness lasts is important for shaping future behaviors) they take sides two very powerful deflationary forces: globalization and technological progress.
Moreover, allied very often. As in the case of production of electric cars. Tesla, a US brand, now made in Germany, takes 10 hours to manufacture one, against the 30 needed by VW (20 from next year). The war has just begun.
Then the guarantee that is the norm in the code of criminal procedure must be applied: to be convicted, the prosecution must have proof that beyond any reasonable doubt (in the USA the unanimity of the 12 popular judges is required). And the jury of central bankers doesn't have them so solid: they too are looking through the kaleidoscope.
So they avoid the risk of condemning the socio-economic system at higher rates (and damning their souls), still recovering from the pandemic. If, in the end, it turned out that he should have been acquitted for not committing the crime, it would set us back into a fierce recession spiced with deflation.
Cogitate and doubt they are two sides of the same coin that central bankers wear around their necks.
RATES AND CURRENCIES _ «There is something new in the air today, rather something ancient». The vast majority of central bankers he doesn't even know who Giovanni Pascoli is. Nor does he know hers The kite. If they knew it, they would recognize themselves in the verse that recalls the turning of the seasons.
"After Winter, always come Spring," says Chance the Gardener in Beyond the gardenSwan Song by Peter Sellers. And there would be less 'rumors' around the muffled rooms of the ECB, the releases of the Fed and the Bank of England (BOE). Which yes they are enjoy kicking in the shins of the markets, to prevent the bet on the next and imminent rate hike from becoming one-sided: red I win, black I don't lose.
However it is true that the discrepancy between inflation rates and yields it is unusual. The graph shows that there has never been such a gap in the US.
Central Banks also have a dilemma: on the one hand, inflation is rising, both in terms of raw materials and producer and consumer prices. And on the other side there are wide eyes'vigilantes' ready to intervene on the bond markets. James Carville, an adviser to then President Bill Clinton, said that he would like, in case of reincarnation, to become the Bond markets so as to be able to "intimidate anyone".
Therefore, although they are convinced that the surge in inflation is a transitory phenomenon, they must reassure i vigilantes without, however, risking putting a spanner in the recovery wheels with ill-timed rate hikes. They have chosen for now the way of advertisements of gradual reduction of the purchases of securities, postponing the rate increases, which have a greater value of restriction.
Of course, this does not mean that monetary policy becomes tight. It simply becomes less expansive and, on closer inspection, in line with the improved prospects of the real economy. The chart shows how nominal rates on ten-year government bonds went up slightly, before the sharp correction triggered by the too reassuring decisions by FED and BOE and Madam Lagaffe's verbal course correction. Sorry, Lagarde.
Why in Italy they have risen more than elsewhere (except then to go back down just as quickly)? There are two reasons: first, any announcement, near or far, of less generous monetary policy affects countries with high public debt relatively more. And the Italian one continues to be high, even discounting the part of the debt owed to the ECB/Bank of Italy: a part of the debt which – said in a low voice – is not real debt.
The second reason lies in politics: the markets have a reasoned - if not blind - faith in Mario Draghi and, now that the crux of the election of the President of the Republic is approaching, they are concerned that ours may leave the leadership of the Government and ascend to the hill (damn the hypothesis). And the markets worry.
instead, real rates are at a standstill, or worse, crushed by inflation rates. Except in the case of BTPs, for the reasons stated above; however, even for BTPs real rates are still negative, and the least that can be said is that they are not an obstacle to recovery.
For exchanges, the dollar it has the muscles of the economy on its side, the performance on the fight against Covid and also the differential in long-term real rates (T-Bond minus the Bund): it was zero, and is back positive by a hundred basis points. But compared to yuan these advantages of the dollar were not enough: the Chinese currency, despite the ongoing slowdown of the real economy and the Evergrande saga, held its own against the greenback, and even appreciated slightly (compared to the euro, it is at the strongest level since four years).
It is always difficult to scrutinize exchange rate trends chinese coin which, as we know, is somewhat controlled ('he doesn't move a leaf if Xi doesn't want'), and we don't venture into psycho-political interpretations.
But there is also a more strictly economic interpretation: the Chinese trade surplus is climbing (and it is no coincidence that the US trade deficit is at record levels) and there have been large inflows of funds into the Chinese bond market (reversible, the latter).
And we come to stock markets. The fix we had contemplated in the last few Lancet (while warning that this would only be a correction, and that equity investing remains at the top of the wish list) was smothered in the cradle. The S&P 500, after 'correcting' by 5%, has broke new records towards magnificent and progressive fortunes. A correction is still possible (indeed, whoever continues to predict corrections will sooner or later be right…).
the alternatives to equity investment, the market for bond (the one that "intimidates anyone") has become more risky, given the oars of the central banks that turn towards the boat. Gold has been stable for a long time, a little above and a little below $1800/ounce, and this inability to rise does not lead to good prognoses. We won't comment on cryptocurrencies: they are too cryptic.
