The interdependence between economies it is a good thing, because the exchange networks do not lead to conflicts. This optimistic vision has distant roots. Immanuel Kant wrote, already in the eighteenth century, that "the spirit of commerce ... sooner or later, infects every nation, and is incompatible with war”. Norman Angell – Nobel Peace Prize in 1933 – stated that the interdependence between countries makes war unprofitable. And in the last century two economists - the Austro-Hungarian Karl Polanyi and the German-American Joseph Schumpeter - said, the former, that the emergence of international finance made the greatest contribution to peace in Europe between the end of the Napoleonic wars and the advent of the Great War; and, second, that the advance of capitalism inclines the soul towards anti-war postures. More recently, the New York Times columnist Thomas Friedmann put forward an interesting theory, the 'Golden Arches Theory of Conflict Prevention' – where the Golden Arches refer to the logo of the McDonald's. The theory states that when a country has reached a stage of economic development with a middle class large enough to support a chain of McDonald's, then he will no longer be interested in warfare.
Economy in the storm, interdependence is beautiful but also fragile
What are we to think of that 'theory' now that the Russia e Ukraine (both with large numbers of McDonald's) face each other on the battlefield? It becomes evident by now that the global conquest of McDonald's was not the harbinger of a new era, as some have put it, of "globally shared peace, prosperity and diabetes", but the evidence of a simple fact: to the people, a little ' everywhere, like to eat junk food which is cheap.
Defenders of the theory may say that every rule has its exceptions, but in this case the exception is a big one. And the consequences are not over. For some time now (statistics fix the turning point in 2008) what was the inexorable pace of the globalization it had stopped: first the pandemic and then the war opened new cracks. Interdependence is beautiful but it is also fragile: lower costs and intensify exchanges, but also facilitates the passage of crises along the links of the overly lubricated supply chains.
Interdependence, three useful correctives for Italy
Three corrective have emerged, and all three offer opportunities to Italian producers. The first corrective is that of strategic assets. Globalizing is nice, but it's also nice to diversify, so as not to be too dependent on just one or a few suppliers. We have seen it with the medical equipment necessary to contain the pandemic, and we see it today with that strategic asset par excellence which is energy. And let's also look at it for the basic products needed by the pharmaceutical industry, as well as for that 'technological raw material' which is chips. All of this leads to the need to invest to diversify, and Italy is well positioned to become a producer of strategic goods.
Il according to corrective lies in the fact that the blind game of convenience no longer has to look only at cost savings. The supplier must not only be affordable but also reliable. And authoritarian countries, from Russia to China, can use their supplies as a weapon of geopolitical blackmail (as is clearly seen today with Russian gas). The 'reshoring' (the return home of previously delocalized productions) thus also acquires the dimension of the 'friendshoring' (relocate yes, but only to friendly countries). And Italy is certainly a friendly country, ready to receive hijacked settlements from non-friendly countries.
Il third corrective lies in the transition from 'just in time' (which underlay the supply chains) al 'just in case': in the case of 'black swans' it is good to have more options to maintain that production that previously walked on the edge of 'just in time'. In short, a country like Italy, geopolitically solid, economically flexible and historically clever in reorienting products and processes, can draw a joker in this globalization 2.0.
Stormy economy and the opportunities of globalization 2.0
In fact, it is advisable to list a few numbers from the «Perhaps not everyone knows that» series, among the most pleasant sections of the Puzzle week. The fact that Italy be the second manufacturing nation in Europe and the seventh in the world is almost vox-populi, but less known is that it is second, ahead of China and behind the usual Germany, due to the complexity of the export, i.e. by the number of markets (understood both sectorally and geographically) in which it sells across borders. It is known that the three effes (food, fashion, furniture) give prestige to made in Italy with about a fifth of exports; few know that the spearhead of manufacturing consists of metalworker (one third of exports) and in particular from machinery (53% of the manufacturing surplus); i.e. very complex goods with a high content of knowledge (now made more of electronics than mechanics). Another large chunk of exports comes from pharmaceutical chemical (10%) and from metallurgical (10%), i.e. goods that are not exactly low-tech. While at the top in the ranking for technological intensity is industry aerospace (50% of the ISS was built in Italy) and the GE factory made up of 3D printers. Finally, Italy is unrivaled among advanced countries for integrity, length and depth of manufacturing chains: a quality that makes it ideal base for the relocation of activities in the redesign of global value chains.
All right, then? Absolutely not. To realize this extraordinary potential the grounding of the PNRR is essentialboth on the spending side and, perhaps more importantly, on the reform side. Full ahead Draghi government!
And certainly not all is well in the landscape of world situation. While it is difficult to separate the grain of demand strength from the chaff of supply bottlenecks, they continue to exist and prevent orders from becoming sold products and therefore pull down consumption and investment statistics.
Stormy economy: USA, Europe, China, the differences
This certainly helps to explain the strange case of the risk of technical recession for the USA: after the -1,6% annualized in the first, some estimates for the second quarter point to another decline. The case is strange because: the output component of the composite PMI continued to signal robust expansion, albeit slowing down in the last two months; employment increased at a rapid pace. With regard to the latter, it is true that the weekly hours have dropped somewhat, but the combined results in a significant increase in hours in both quarters.
In the Eurozone the slowdown in progress has not so far been much stronger than the American one, despite the fact that the effects of the war, both via confidence and via the worsening of the terms of trade, are undoubtedly greater. However, two differences can be noted in favor of the Old Continent (also demographically): the anti-Covid restrictive measures have been greater and, therefore, also the rebound linked to the desire to return to life was superior; The worsening financial conditions due to the change of course of monetary policy was strongest in the US. The impression, however, is that everywhere demand is weakening, as evidenced by the trend of orders, even if their level is extraordinarily high (the entrepreneurs, when questioned, answer that they do not remember such an abundance) and in many cases the offer fails to keep up with the requests for lack of inputs and workers (as evidenced by the cancellation of flights in all European airports).
The past Lancette had especially taken care of the Chinese case. Now we have to observe how, as soon as the restrictions have been relaxed, supply and demand have restarted. But with them also the infections, and so here are new restrictions. The package of expansive measures just announced appears useful to counter the recessionary impact of the construction boom and other re-regulation interventions of some markets. However, it cannot do anything against the effects of zero-Covid.
Inflation: Will the descent be as steep as the climb?
neckline it's the most coveted moment by cyclists after a tough climb. You feel much lighter when the asphalt strip begins to let go and bends towards the flat before going downhill, almost never smooth and straight. So it is also the moment that precedes the most dangerous phase. Is inflation going downhill? And will its decline be as startlingly steep as the surge has been? These are the questions on the lips and in the heads of many.
First of all, governments (including His Majesty's, when he gets one back...) called to support businesses and families by once again drawing on public money. In Germany there was even an unprecedented meeting with employers, trade unions, the Bundesbank and the Chancellor, on the latter's initiative. Unusual but not surprising given the high Teutonic ability to create a system and cohort. Although the latter is an action invoked several times in the Hymn of Mameli, it is really difficult to imagine that it also happens in Palazzo Chigi, until some actors pose more a head of the people instead of measuredly and responsibly, as leaders of intermediate bodies.
And then i central bankers, called to urgently put on the firefighters' uniform and to drain liquidity to put out the fire (in economics, money has the same effect as water on the Greek fire, which the more you threw on it, the more it flamed), knowing full well that the expensive bills takes fuel away from the question.
And more gods financial markets, who believe that the peak of the price heat is now and are betting on the fact that the Fed and the ECB will not have to follow their words with deeds, because the worsening terms of trade and financial conditions are already thinking about it to cool demand. And finally some companies, which must act as heels and toes (for Millennials and subsequent generations: heel and toe of the right shoe, to be used respectively on the brake and accelerator, to calibrate the uphill restart of the car) on the price lists, updating them frequently based on the change of production costs and discriminating between new and old customers (in favor of the latter).
The conventional answer to first question placed above is: the brow could occur from September onwards, when comparing with the monthly increases in the second half of 2021 (+0,4% average in Italy; elsewhere the size changes, not the timing) and the first half of 2022 (+0,9%). For comparison, prices have risen twice as much in the last twelve months as they did in the entire seven years preceding the pandemic. Clearly an unsustainably intolerable step. So it has to come down. It will come downand therein lies the reassuring certainty.
But focus on the eventuality let the fever pass quickly how it arrived and without the cost of money having to go up that much is likely to turn out to be illusory why: qualitative surveys show that i input price increases continue to be very strong, at record levels or slightly below (PMI component prices paid and charged); the bottlenecks supply will persist, worsening every time the Covid infections spread, especially in China (and autumn, as we know, favors them); the energy crisis, which is the continuation of war by other means, will have a resurgence when the gas demand seasonally it will rise; the scarcity of the most precious resource, work, will fully manifest itself during the summer and will push up wages, which has always been the main source of cost increases and home-made inflation.
Then, as has happened in the last two years, everything could suddenly change: the prices of raw material collapse (somewhat is already happening), the migratory flows resume, the China stop with the lockdowns and give up on Taiwan, the medium-high pace burst… Easier for a camel to go through the eye of a needle?
Rates and currencies, the recession and the slowdown in prices
«…Siena made me, Maremma unmade me…»: if instead of Pia de' Tolomei we put the rates, if instead of Siena we put inflation, and if instead of Maremma we put the recession, the bold metaphor could sound like this: rates have risen due to inflation (triggered by bottlenecks and raw materials), but they could be 'undone' due to the recession, which cools prices.
Le Central banks have made it clear that their priority is to push back price increases towards the 'Sacred Chalice' of 2%. And, at least the Fed has hinted that if tightening policy leads to recession, this will be the lesser evil versus a 'let it go' which would necessitate a stronger tightening (and therefore a more severe recession) tomorrow. Certainly, the central banks (and we would not like to be in their shoes today) have also said that their policies will be – as always but especially today – directly on the data. And this opens the door, according to some, to an optimistic scenario: just like the banks (and many others, including the undersigned) had underestimated the intensity and duration of the inflationary wave, could now underestimate the possible cooling of prices linked to weakening economies (despite cost increases in pipeline and wage pressures). Of course, the other 'live' is in the war events, on which it is not possible to predict.
A first warning lies in the sharp reduction in long-term rates. The yields of T Bond, Waist and btp had reached highs of 3,44, 1,77 and 4,26% respectively in June, today they have dropped sharply. Inflation worries have been (temporarily?) replaced by fears of recession. And it is spread BTp/Bund, which had touched 250 points, today fluctuates around 200.
Looking further ahead, the risks for Italy - the so-called 'fragmentation' – I'm lurking. What is fragmentation? In a dispersion of returns among the euro countries which does not reflect the fundamentals of the economies, but reflects the fatal risk of 'renaming', which is another difficult word for Italy's (or another country's) exit from the euro. The thought runs to 2012, to the sovereign debt crisis, al whatever it takes… (whose 10th anniversary will be celebrated in a few days).
The ECB prepares the anti-spread shield. The dollar runs
La ECB, mindful of those tumultuous days, wants to avoid a replay, and made some proposals in this regard. But the markets are not satisfied with words, especially as i usual known in the Council of the ECB (Bundesbank & C.) have already made it known that any support program will have to satisfy strict criteria of conditionality and proportionality. It is therefore possible that the markets want to test the ECB. Ideally, the latter should prepare something similar to Outright Monetary Transactions (OMT) which Draghi got approved by the Council shortly after the famous speech. The masterpiece was that OMTs were never used: the announcement of the whatever it takes to calm the hot spirits. Let's hope the ECB follows a similar path, albeit alla Lagarde it lacks the decisiveness and maneuverability of its predecessor.
In the currency field, the dollar accelerates its run and the euro risks falling towards parity with the greenback, or below. They play in favor of the dollar geopolitical factors – the military muscles, the distance from the war theater, the role of a safe haven… – e differentials of growth and rates compared to the Eurozone. The Yuan it also weakened, but not as much as the euro. The depreciation of the single currency complicates the inflation picture, even if the Eurozone, like the USA, is a relatively closed economy. Luckily, raw material costs have been declining lately.. And – let's take comfort – the depreciation of the euro favors price-competitiveness both with respect to the USA and with respect to China.
Of note, among the safe haven assets, is the collapse of thegold, which is badly losing its role as a bulwark against inflation. It has also contributed to theembargo on Russian gold, which represents a real reduction in demand (a 'rationing', if you will): Russia will sell less gold and at a lower price. A sanction that worked…
