September 29, 2014
We were not the biggest optimists about the eurozone’s post-crisis economy development, but Italy is now undershooting even our expectations. Istat’s Italian business climate index registered a fall from 88.1 in August to 86.1 in September. This is a broad based downturn, affecting manufacturing, construction, services, and retail (where the decline has been quite dramatic). The data raise the possibility that GDP may have continued to decline during Q3.
The extraordinary and continuous decline of the Italian economy is overshadowed by an ongoing political dispute over the reform of Italian labour laws, and ad hoc industrial action. The latter affected Istat itself. The business confidence data release was postponed after Istat workers occupied the press room three times last week in protest over their job contracts. The industrial action caused a delay in the presentation of the data. Reuters notes in its report that Istat workers belong to the “other half” of the Italian labour market – people on short-term contracts, with no protection rights.
Last Friday we were also reminded of the fickleness of the current low-yield equilibrium, when the departure of Bill Gross from Pimco pushed Italian and Spanish yields up a few basis points. Pimco is one of the largest holders of periphery debt, and as Reuters reports, some market participants were nervous about whether the next chief investment officer might reduce holdings of periphery bonds. It is also possible that investors in the fund might sell out and follow Gross to Janus Capital. The Reuters article also carried comments according to which the impact of Gross was largely overblown – the pressures for flat yields are rather fundamental: low growth, low inflation, and slow and shallow interest rate tightening cycles.
Among commentators, we noted Simon Wren-Lewis, who writes that the downturn in the eurozone periphery should come as no surprise. He said that if you have a fiscal contraction after a financial crisis, then this is exactly what you are going to get. There is nothing specifically Keynesian about this. He says various economic models used by various institutions in the eurozone all broadly came to the same conclusion. He quotes a paper looking at all these models, and finding that fiscal consolidation caused a cumulative GDP loss of between 14% and 20% from baseline GDP over 2011-2013. This would imply a multiplier of between -1.5 and -2.2. Wren-Lewis points to a simulation by the Belgian NIME model, according to which these costs could have been largely avoided if the fiscal consolidation had been delayed until monetary policy was in a position to offset them.
We also have stories on the European Commission’s pending U-turn on TTIP; on Spain’s increase in the GDP forecast; on why Spanish demand for TLTRO was so low; on the French senate elections; on the new PM candidate of the Portuguese Socialists; on how Trichet changed his mind on Irish bondholders; on AfD, why it is dangerous, and how to confront the party; and on the eurozone viscous debt dynamics.