After looking at the potential plans of the new Italian coalition government, assuming it gets that far yesterday let us move onto the economic situation. Let us open with some news from this morning which reminds us of a strength of the Italian economy. From Istat.

The trade balance in March 2018 amounted to +4.5 billion Euros (+3.8 billion Euros for non EU area and +0.7
billion Euros for EU countries).

There is an immediate irony in having joined a single currency ( Euro ) to boost trade and find that your main surplus is elsewhere. However some 55.6% of trade is with the European Union and 44.4% outside so there is a sort of balance if we note we are not being told the numbers for the Euro area itself. If we do an annual comparison then it is not a good day for economics 101 either as the relatively strong Euro has not had much of an effect at all as the declines are mostly within the European Union.

Outgoing flows fell by 2.2% for non EU countries and by 1.5% for EU countries. Incoming flows increased by 0.4% for EU area and decreased by 0.5% for non EU area.

Actually both economic theory and Euro supporters will get some more cheer if we look at the year so far for perspective as exports with the EU ( 5.5%) have grown more quickly than those outside it (0,5%). The underlying picture though is of strength as in the first quarter of 2018 a trade surplus of 7.5 billion Euros has been achieved. If we look back and use 2015 as a benchmark we see that exports are at 114.1 and imports at 115.9 so Italy is in some sense being a good citizen as well by importing.

The main downside is that Italy is an energy consumer ( net 9.4 billion Euros in 2018 so far) which is not going to be helped by the current elevated oil price.


This is an intriguing number as you might think with all the expansionary monetary policy that it was a racing certainty. But reality as so often is different. If we look at the trading sector we see this.

In March 2018 the total import price index decreased by 0.1 % compared to the previous month ; the total twelvemonth
rate of change increased by 1.0%.

So quite low and this is repeated in the consumer inflation data series.

In April 2018, according to preliminary estimates, the Italian harmonised index of consumer prices (HICP) increased by 0.5% compared with March and by 0.6% with respect to April 2017 (it was +0.9% in the previous month).

Just for clarity that is what we call CPI in the UK and is not called that in Italy because it has its own measure already called that. Apologies for the alphabetti spaghetti. Such a low number was in spite of a familiar influence in March.

The increase on monthly basis of All items index was mainly due to the rises of prices of Non-regulated energy products (+1.1%) ( from the CPI breakdown).

Although there was also a reduction in regulated energy prices. But in essence the theme here is not much and personally I welcome this as I think that driving inflation up to 2% per annum would be likely to make things worse if we note the sticky nature of wage growth these days.

If we move to an area where we often see inflation after expansionary monetary policy which is asset prices we again see an example of Italy being somewhat different.

According to preliminary estimates, in the fourth quarter of 2017: the House Price Index (IPAB) increased by 0.1% compared with the previous quarter and decreased by 0.3% in comparison to the same quarter of the previous year (it was -0.8% in the third quarter of 2017);

The numbers are behind the others we have examined today but the message is loud and clear I think. Putting it another way Mario Draghi is I would imagine rather disappointed in the state of play here as it would help the struggling Italian banks by improving their asset base especially as such struggles draw attention to the legal basis for them known as the Draghi Laws which have been creaking.


The good news is that there is some as you see there is a case to be made that the trend rate of growth for Italy is zero which is not auspicious to say the least.

In the first quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by 0.3 per cent with respect to the fourth quarter of 2017 and by 1.4 per
cent in comparison with the first quarter of 2017.

If we stick with what Chic might call “Good Times” then Italy beat the UK and drew with Germany and France in the quarter just gone. However it was more their woes than Italian strength sadly as I note that even with this economic growth over the past four years has been 4.3%. This is back to my theme that Italy grows at around 1% per annum in the good times that regular readers will be familiar with and the phrase girlfriend in a coma. Less optimistic is how quarterly GDP growth has gone 0.5% (twice), 0.4% (twice) and now 0.3% (twice).

Labour Market

Here is where we get signs of real “trouble,trouble,trouble” as Taylor Swift  would say.

unemployment rate was 11.0%, steady over February 2018…..Unemployed were 2.865 million, +0.7% over the previous month.

The number has fallen by not by a lot and is still a long way above the 6-7% of the pre credit crunch era. So whilst it is good news that 190,000 more Italians gained jobs over the preceding 12 months that is very slow progress. Also wage growth seems nothing to write home about either.

At the end of March 2018 the coverage rate (share of national collective agreements in force for the wage setting aspects) was 65.1 per cent in terms of employees and 62.1 per cent in terms of the total amount of wages.

In March 2018 the hourly index and the per employee index increased by 0.2 per cent from last month.

Compared with March 2017 both indices increased by 1.0 per cent.

So a very marginal increase in real wages.


One thing that has struck me as I have typed this is the many similarities with Japan. Let me throw in another.

According to the median scenario, the resident population for Italy is estimated to be 59 million in 2045 and 54.1 million in 2065. The decrease compared to 2017 (60.6 million) would be 1.6 million of residents in 2045 and 6.5 million in 2065.

A clear difference can be seen in the unemployment rate and of course even Italy’s national debt is relatively much smaller although not as the Japanese measure such things.

The bond yield is somewhat higher especially after yesterday’s price falls and the ten-year yield is now 2.12% but here is another similarity from a new version of the proposed coalition agreement.

I imagine this would mean asking banks to hold less capital for the loans they give to SMEs. This would make banks more fragile and – in the 5 Star/League world – could lead to more “public gifts” to private banks. ( @FerdiGuigliano )

The Bank of Japan had loads of such plans and of course the Bank of England modified its Funding for Lending Scheme in this way too. Neither worked though.

Meanwhile we cannot finish without an apparent eternal  bugbear which is the banks.

League and 5 Star also have plans for Monte dei Paschi, which has been recently bailed out by the Italian government. They want to turn it into a utility, where the State (as opposed to an independent management) decides the bank’s objectives.

Me on Core Finance TV