Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The Italian economy continues to disappoint
Christopher Dembik
Head of Macroeconomic Research
Summary: Italy's latest quarterly GDP numbers show that the economy is in far worse shape than most people thought.
Italy's Q3 2018 GDP flash result is out at 0% versus the 0.1% that was expected. The YoY growth rate has slowed to 0.8% from 1.2%. This confirms without any doubt that the Italian economy is decelerating and that the consensus and the European Central Bank are too optimistic about 2018 and 2019 GDP.
We have warned many times that the European economy is in worse shape than is generally thought, especially in Italy. All leading indicators are pointing down: The Bank of Italy coincident indicator, which leads industrial production by four months, is close to zero and Italy credit impulse has been in contraction all year long.
We have warned many times that the European economy is in worse shape than is generally thought, especially in Italy. All leading indicators are pointing down: The Bank of Italy coincident indicator, which leads industrial production by four months, is close to zero and Italy credit impulse has been in contraction all year long.
As we've mentioned many times, Italy’s main issue is related to the lack of growth, which obviously complicates the budget equation. We are sceptical regarding the impact on productivity and investment of the proposed measures of the coalition. That being said, we won’t expect a “hot autumn” for Italy. S&P's rating review last Friday (outlook was lowered to negative, but the rating was unchanged at two notches above junk) was considered as rather positive by the market.
The risk of an escalation in tensions between Rome and Brussels is limited. It seems more and more obvious that Italy will slightly lower its overoptimistic growth forecasts and proposes a mechanism to avoid pushing the deficit beyond the permitted limits.
It is in the interest of the European Commission and Italy to find a middle ground. Italy still has a few weeks left to offer some input or modifications before Brussels issues its formal opinion, which is due on November 30.
An agreement is necessary because first, Italy needs very favourable market conditions to face the massive maturity wall that will reach about €300bn in refinancing in 2019 and second, the European Commission cannot countenance a political crisis with a member state that would fuel populist movements ahead of the European Parliament elections next May.
The risk of an escalation in tensions between Rome and Brussels is limited. It seems more and more obvious that Italy will slightly lower its overoptimistic growth forecasts and proposes a mechanism to avoid pushing the deficit beyond the permitted limits.
It is in the interest of the European Commission and Italy to find a middle ground. Italy still has a few weeks left to offer some input or modifications before Brussels issues its formal opinion, which is due on November 30.
An agreement is necessary because first, Italy needs very favourable market conditions to face the massive maturity wall that will reach about €300bn in refinancing in 2019 and second, the European Commission cannot countenance a political crisis with a member state that would fuel populist movements ahead of the European Parliament elections next May.
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