Slovakia Takes The Biscuit - GDP Drops 11.2% In Three Months

I've been trying to draw attention to what is happening to Slovakian GDP for some months now, since I felt the consensus has been missing something (see this post, and this one). The Economist, for example, has been arguing some sort of version of Baltic and Hungarian exceptionalism in Eastern Europe, and even pointing to Slovakia as a positive example to be followed.

“Most other countries in the region are faring much better, though….Like Slovenia, which joined two years ago, Slovakia can enjoy the full protection of rich Europe’s currency union, rather than just the indirect benefit of being due to join it some day.”

This example is far from isolated, yet, as I have already indicated in this post, the April EU sentiment indicator showed that business and consumer confidence in Slovakia was doing rather worse than the even that in the Baltics, so something relatively unpleasant was obviously happening.

And now we know for sure that it was, since according to last Friday's flash data release from the national stats office Slovakia's economy contracted by 5.4 percent year on year during the first three months of 2009. By way of comparison we could note that the economy expanded by 8.7 percent year on year in the first quarter of 2008. The latest results simply confirm what most Slovak economy watchers, the central bank, the European Commission and others already knew: the country is set to enter recession and remain there throughout 2009.



While the sharpness of the contraction in the first three months is pretty eyebrow raising, it does not come as a total shock, since in its revised GDP estimate released on April 7, the National Bank of Slovakia had already forecast that Slovakia’s economy would contract by 2.4 percent over the course of 2009. At the end of 2008 the bank was projecting growth of 2.1 percent for 2009, so the turnround is pretty sharp. And while the local stats office haven't yet given us a seasonally adjusted quarterly figure for the contraction, last Friday's Eurostat EU GDP release gave the figure of 11.2% for Slovakia q-o-q (which may well not be seasonally corrected, so I am evidently not suggesting they were dropping at a 44.8% rate in the quarter, which would obviously be ridiculous).



Total employment is also also down, falling in the first quarter of 2009 by 0.4 percent year-on-year, so that at the end of March there were 2,199,900 persons employed, according to the stats office.

In presenting the data, František Palko, state secretary of the Economy Ministry, argued that a year-on-year drop in GDP by as much as 5 percent had been expected in the first quarter due to impacts of the Russian gas crisis - which affected Slovakia at the beginning of the year - and the decline in external demand for Slovakia's products.

Certainly this decline is evident, since Slovak industrial output fell 22.9 percent in the first three months of the year, led unsurprisingly by the car industry, which had previously been the growth motor. In fact Slovak industrial output contracted at a slower inter-annual pace in March following a record plunge in February since European government incentives helped with car production and the electronics industry continued to expand. Output was down an annual 18 percent, making March the sixth consecutive month when production has contracted, a figure which compares with the revised 25.6 percent decline in February. Car production was down 30.1 percent year on year, compared with a 44 percent drop in the previous month.





The lions share of the fall in industrial output was due to a fall in demand for exports - Slovakia is a small, trade-dependent economy, and March exports decreased by 20,1 % compared with March 2008. Imports were down even more, by 23,1 %, and as a result the trade balance was in surplus (EUR 81,9 million). Over the first three months, as compared with the corresponding period last year, total goods exports were down by 28,6 % and total goods imports by 28,2 %. The quarterly trade balance registered a deficit of EUR 51,2 million (up by EUR 45,6 million compared with the same period in 2008).

Inflation Heading To Zero

The net result of the collapse in demand is an increase in the output gap and strong downward price pressure - in particular since as a member of the eurozone Slovakia no longer has its own currency to devalue. So it is hardly surprising to find the country's EU harmonized annual inflation rate falling back to 1.4 percent in April, its lowest level since August 2007, and down from 1.8 percent in March. Month on month, prices fell by 0.1 percent following a 0.3 percent decline in March.

Indeed Slovakia is on the threshold of negative year on year inflation since consumer price indexes (both the general index and the core one) have actually been flat now since the start of the year (see chart below).


Waning demand is also leading companies to cut back on their workforces, pushing the March unemployment rate to 10.33 percent, the highest in almost three years. The rate, which is the highest since June 2006, was up from from 9.72 percent in February, according to the Bratislava based National Labor Office. The number of unemployed available for work in the country of 5.4 million people increased to 273,779 from 257,564. The unemployment rate has now been rising steadily from a record-low of 7.36 percent achieved in August last year. The EU harmonised rate published by Eurostat was up at 10.5% in March, from 10% in February.

Despite all the talk of Slovakia having a "fexible" labour market, 7.36% is still a very high rate of employment to run when the economy is experiencing a massive boom, so it will be very interesting to see the actual rate of downward movement in wages (and prices) as the recession moves forward (another kind of "stress testing").

Pressure On Public Finances

Slovakia’s central budget deficit widened to 347.4 million euros at the end of April as the economic slowdown cut into tax revenue, according to the Finance Ministry. Revenue for the first four months of the year was 3.32 billion euros, lower than expenditure which amounted to 3.67 billion euros. The shortfall compares with a 204.6 million-euro difference in March and a surplus of 257 million euros at the end of April 2008. Slovakia originally targeted a central government budget deficit of 1 billion euros in 2009, or a shortfall of 2.1 percent of gross domestic product.

The Finance Ministry now estimates tax revenue will be about 1 billion euros short of the original projection, which was based on an expectation for GDP growth of 2.4 percent this year. The central bank now forecasts the economy will shrink 2.4 percent.


In 2008, the general government deficit increased to around 2.25% of GDP. The better-than expected budget outcome was the result of a number of the revenue-increasing measures (e.g. broadening of the corporate and personal income tax base, increase in the maximum ceiling on social contributions), which offset the revenue shortfall due to the deteriorating economic situation.

The 2009 general government deficit is forecast by the EU Commission to increase to 4.75% of GDP. On the revenue side, the anti-crisis packages include measures such as a temporary increase in the tax-free part of income from €3,435 to €4,027, an in-work benefit for low-income employees (negative income tax), as well as a decrease in social contributions for mandatorily insured self-employed. On the expenditure side, the bulk of the measures with budgetary impact are related to the subsidies for R&D activities, for programmes aiming at increasing energy efficiency and supporting existing or newly established SMEs as well as for the Slovak cargo and railway company.

The EU Commission expect the general government deficit to rise to 5½% of GDP in 2010, with the debt-to-GDP ratio increasing from 27.5% of GDP in 2008 to some 36% in 2010. Despite the deficit in excess of 3% of GDP, gross public debt is still very low, and ratings agency Standard & Poors were generally pretty positive in their most recent Slovakia outlook. They did however see two significant challenges lying ahead for Slovakia.

1) Firstly the rather obvious point that here is an increasing risk to the economy from Slovakia's high exposure to the auto sector.

2) And secondly, the rather more important point that since conversion to the euro was undertaken when the Slovak Koruna was trading at a short term peak - the government were using currency appreciation to soak up inflation and stay withing the Maastricht euro limits (see this post here) - Slovak exports are now somewhat penalised compared with those coming from some of their neighbours (the Czech Republic, Poland and Hungary) - in terms of competitiveness, since while they were also using currency appreciation as an anti inflation posture during the height of the commodities surge, they have since been able to "correct" and allow their currencies to devalue. Personally I can't stress too strongly how important an issue I think this is.

The Slovak economy is very open, and indeed has become impressively more so in recent years. It is in fact the third most open economy in the EU after Luxembourg and Malta, according to Eurostat data (in the sense of a “small open economy”). In terms of trade in goods, Slovakia is even the most open economy in the EU. This situation in part reflects the country's small size - Slovak GDP represents only 0.6% of eurozone GDP, or some 2.4% of German GDP. Given Slovakia is so small and so open, a high proportion of domestic demand will now be met by imports from “cheaper” neighbours (notably Hungary and Poland). So Slovakian growth will have to rely more on investments in productive capacity and exports.

As I said above in this sense a shift in emphaisis is called for, since the economy is incredibly vulnerable to the automotive sector, and this in a situation where European car sales have slumpled, is, as weak can see, a lethal flaw. In fact the situation has been made worse by the recent wave of government-backed incentives, since they have only exacerbated the slump in demand for luxury models - like the Cayenne, the Audi Q7 and the Volkswagen-brand Touareg SUVs - which are over-represented in the Slovak sector ((in contrast, theCzech car industry is strongly profiting from car scrapping subsidies). These subsidies together with accompanying environmental incentives have shifted Europe’s shrinking car demand toward smaller and more fuel-efficient models, and hence global No.1 luxury carmaker Bayerische Motoren Werke AG’s registrations dropped by almost one-third in April (to 55,633) even as the German market as a whole expanded 19 percent. Daimler recorded a 26 percent sales decline to 60,214 cars, led by its Mercedes luxury brand.

The Slovak government has been having some success in diversifying the economy, for instance by attracting Sony and Samsung production facilities. Production of cars was down 30.1 percent in March, while output in the electronics industry rose an annual 50.3 percent.

More worryingly, the amount of foreign-investment pledged to Slovakia slumped 92 percent in the first quarter of the year as the global slowdown prompted companies to delay expansion. The only two projects brokered by the state SARIO investment agency in the first three months represent a total investment of 8 million euros, with the potential to create 220 jobs, according to spokeswoman Jana Murinova. In the same period last year, the agency negotiated nine projects worth 103 million euros and creating 1,455 jobs.

Slovakia adopted the euro last January, is now feeling the pressure of price competitiveness from neighbours who have retained an autonomous capacity to devalue their currency as investors as scale back expansion plans during the slowdown. During 2008 Slovakia attracted investment projects worth 538 million euros, less than a half of the 2007 total of 1.28 billion euros.

The Slovak case raises important questions, not least about the rigid application of the Maastricht criteria in a situation where they may not only have lost much of their original relevance, but even where they may lead to distortions - as in the Slovak case - which may mean a painful period of internal wage and price deflation is necessary to overcome the loss of competitiveness produced by entering the common currency at an unrealistically high parity .

Slovakia may now face a difficult period (like Portugal - see this post) of internal price adjustment having entered the euro at too high a rate. The openness of the economy will require more price and wage flexibility. Slovakia joined EMU with a relative strong exchange rate. Currencies of neighbouring countries have been depreciating significantly against the euro. So we are seeing strong deflationary pressures, and average industrial wages fell an annual 0.6 percent in March, following a 1.9 percent fall in February. In nominal terms, average monthly wages rose to 718 euros from 687 euros in February. However, for now these are nowhere near on the same scale as, for example, the impact of the drop in sterling on Ireland.

On a side issue Slovakia issued a 2 billion euro, 2015-dated bond yesterday at 170 basis points over mid swaps. So this can give you some idea what new eurozone members can expect in the future, somewhere up there in the spreads with Greece and Ireland. Slovakia is rated A1 by Moody's Investors Service, A+ by Standard & Poor's Corp. and A+ by Fitch Ratings.

So, while Hungary is still the worst performer among CEE EU member economies the two recent members of the Eurozone - Slovenia and Slovakia - are doing worse than anyone would have imagined, and this should lead to some serious questions being asked in Brussels and Frankfurt. Why is it that, for example, participants in a crisis racked economy like Latvia (whose economy is contracting at an 18% annual rate, and whose bankers and politicians are moving heaven and earth to try to scrape through the qualifying hurdle for eurozone membership) are still feeling better than many economic agents in the Eastern two countries who have actually managed to access the zone according to the latest reading of the EU Economic Sentiment Index. Eurozone membership is not a one way street, far from it. So what are the benefits, and what are the dangers, and how do we optimise the membership process?

References

Portugal Sustains - what are the lessons of Portugal's membership of the Eurozone (12 January 2009)

Slovakia’s Euro Membership Bid (April 21 2008)

Let The East Into The Eurozone Now! (22 February 2009)

German GDP Falls At An Incredible 15.2% Annualised Rate

“I believe there are some grounds for being optimistic that the pace of decline in economic activity will decelerate markedly in the months ahead,” was the view being expressed by Bundesbank President Axel Weber earlier this week. And we'd better hope he's right, since with figures from the Federal Statistics Office this morning showing that Germany's recession worsened considerably in the first quarter, with the economy shrinking by 3.8 percent compared with the previous three-month period I would hate to see it accelerating. Basically a 3.8 percent contraction in three months is equivalent to a 15.2% contraction as an annualised rate, so the chances are he is right, this is a breathtaking pace, and is unlikely to be maintained. But slowing down the rate of contraction is hardly equivalent to recovery, a point weber was quick to reinforce. “However, it is certainly not advisable to be overly optimistic that the recovery process is safely on track. This will most likely be a gradual process," he added.

This is, in fact, the fourth consecutive quarter of contraction, and is the worst performance by the German economy since at least 1970 - when the German statistics office started the present time series. It is also the first time since reunification in 1990 that the German economy has experienced so many quarters of negative growth. GDP has was dragged down by the drop in export and and the consequent weakness in investment.


Year on year GDP fell by 6.7%, following a 1.7% reading in the fourth quarter of last year. Corrected for working days, GDP fell by 6.9% year on year. Last month the government revised its forecasts and is now expecting an annual contraction of 6%.



The 16-nation euro zone also slumped by a record of 2.5 percent quarter on quarter in the first there months. This is worse most analysts had been predicting as recently as a few days ago, when forecasts were pointing to a decline of around 2 percent. While Germany, Europe's largest economy saw the deepest slump, Austria was not far behind with a drop of 2.8 percent and Italy with its 2.4 percent contraction in the first quarter. Meanwhile, Europe's second largest economy, France, also saw negative growth, sliding by 1.2 percent. The 27 member European Union shrank by a quarterly 2.5 percent.

The sharpness of the German GDP contraction in the first quarter of this year is unlikely to be repeated during the rest of 2009, according to German government spokesman Thomas Steg, and given the ferocity of the downturn he is surely likely to be right. But not shrinking so fast is not the same as growing, and there is evidently a lot more pain in the works yet.

There are a number of signs of just this slowing down in the contraction already emerging. Retailer slaes in Germany fell at the slowest pace in the current 11-month sequence of decline in April, according to the Bloomberg retail PMI. Sales were down only modestly in marked contrast to the steep declines recorded at the start of the year. Month-on-month the index for Germany picked up from 44.4 in March to 48.9.




Manufacturing Contraction Eases

German manufacturing contracted for the ninth month running in April, though the pace of the downturn eased to its slowest since last November. The headline manufacturing PMI in Europe's largest economy registered 35.4, still a very low level, but nonetheless up significantly from March's reading of 32.4.

"April's survey provides hope that the German manufacturing downturn has passed its nadir, as the PMI moved further above January's record low," according to Tim Moore, economist at Markit Economics. "However, output still fell at a rate unprecedented prior to the fourth quarter of 2008, prompting firms to trim employment and inventories to the greatest extent in the survey history," he added.

New orders declined for the tenth successive month but at a much slower pace than in March, with the sub-index rising to 37.0 from 28.9 - a series record month-on-month rise. The improvement in the PMI results fits in with other recent sentiment indicator readings in German, with the Ifo institute's business climate index improving in April to its best level in five months, while the ZEW investor sentiment gauge rose to its highest level in almost two years. However, we are still a far cry from a return to output growth in Germany, with most observers anticipating a GDP contraction of between 5% and 7% for 2009, and given the export dependence we should be looking for an increase in imports in main customer economies before we start thinking about any expansion in German manufacturing output.

Industrial Output

German industrial production held more or less steady in March, for the first time in six months. Output was unchanged from February, when it dropped 3.4 percent, according to the latest data from the Economy Ministry in Berlin. Manufacturing industry continued to contract however, and was down 0.4% on the month, and by 22.8% year on year.



That being said, German industrial output levels are now very low (see chart below), and are roughly comparable with those registered in 1999/2000.




Exports Recover Slightly In March


German exports were up for the first time in six months in March, adding to signs that the pace of the economic contraction slowed slighly as we entered the spring. Exports, adjusted for working days and seasonal changes, were 0.7 percent from February, when they fell 1.3 percent, according to the latest data from the Federal Statistics Office. Year on year exports were down 15.8% following a 23.5% drop in February and a 23.2% drop in January.




German imports increased 0.8 percent in March from the previous month, when they dropped 4.8 percent. The trade surplus widened to 11.3 billion euros from 8.6 billion euros in February. The surplus in the current account, the measure of all trade including services, was 10.2 billion euros, up from 6.8 billion euros. On a seasonally adjusted basis exports were up by 0.4 billion euros from February, which means you can just barely notice the change on the chart below: ie there is still a very long way to go here.


Services Contraction Also Slows


Activity in Germany's private sector shrank for the eighth month running in April, though as elsewhere the pace of the contraction eased, in the German case to the slowest rate since last October. The services sector PMI edged up to 43.8 from 42.3 in March, while the business expectations sub index jumped to 44.4 from 39.0, and the headline composite PMI reading rose to 40.1 from 38.3 in March.

Markit reported that "Pessimism about the year ahead outlook for activity was the least marked since June 2008. This partly reflected the support given to business sentiment from the government's economic stimulus plans, as well as hopes that overall market conditions will begin to stabilise". These firmer expectations are consistent with the rise in the April Ifo reading for German corporate sentiment, which hit its strongest level in five months.

However, despite the more positive business expectations, the German government has slashed its forecast for the economy, projecting a record 6-percent contraction this year. Previously it had not shrunk by more than 1 percent in any year since the second world war.

In harmony with this more sober assessment, the sub-index on employment fell to 40.6 from 42.3 in March. "We are now seeing the labour market feel the full force of the economic downturn, with the latest wave of private sector job losses the steepest for at least 11 years," according to Tim Moore, economist at Markit Economics. "This provides advance warning that April's spike in official unemployment numbers will be repeated during the months ahead ... firms are likely to make further substantial job cuts even after the worst of the recession has passed," he added. German unemployment rose for the sixth month running in April to hit its highest level since late 2007 despite government subsidies designed to prevent mass layoffs.

Consumer Confidence Holds Steady

German consumer confidence remained steady for a third consecutive month in April as slower inflation boosted household purchasing power and the pace of the economic contraction slowed slightly. GfK AG’s forward looking confidence index for May, based on a survey of about 2,000 people, remained unchanged from April's revised 2.5 percent reading.

Investor Sentiment Continues To Rise

The ZEW Indicator of Investor Sentiment continued to improve in April, and rose by 16.5 points to stands at 13.0 following a reading of minus 3.5 in March. For the first time since July 2007, The indicator was positive for the first time since July 2007, although it is still well below its long term historical average of 26.1.

According to ZEW the indicator has been positively affected by the German government stimulus packages. Furthermore, investors seem to be taking the view that low inflation rates may give some support private consumption. They also felt that the economic outlook for the United States has improved, and responded to some vaguely positive signals emanating from China.

“Along with other indicators, the ZEW sentiment indicator reveals that there are well-founded expectations that the downward dynamics of the business cycle are bottoming out. It is even becoming more likely that the economy will slowly recover in the second half of this year.”, says ZEW President Prof. Wolfgang Franz.

Whether Franz is right in this very upbeat assessment really does remain to be seen, since I personally am far convinced that we have the bottom of this anywhere in sight yet, especially given German export dependence and the fact that year on year contractions in imports are still very strong in nearly all the major customers.

But Unemployment Is Headed Steadily Upwards

German unemployment rose for the sixth straight month in April. The number of people out of work increased a seasonally adjusted 58,000 to 3.46 million, according to the Federal Labor Agency. The seasonally adjusted unemployment rate rose to 8.3 percent from 8.1 percent in March.

So while an increasing volume of data suggest confidence across Europe is stabilizing and the recession slowing, the continued increase in unemployment may well weaken consumer spending and help prolong the recession. And with PMI surveys showing the employment output as bleak both in the service and manufacturing industries further increases in unemployment now seem inevitable.

Job Creation Turns Negative In March


The number of those employed in Germany was down year on year in March for the first time in several years. According to provisional results from the Federal Statistical Office total March employment in Germany was 39.89 million - a decrease of 46,000 (–0.1%) on a year earlier. The last time the number of persons in employment decreased from the same month a year earlier was in February 2006.



Generally employment increases in March due to the usual spring rebound in economic activity. Over the last three years employment was up by an average 138,000 persons from February. This March, however, the increase was only 53,000 (+0.1%). The Federal Statistics Office noted that the significant extension of the short-time work probably rescued the numbers from being even worse.



Seasonally adjusted the total number of employed was 40.18 million in March, a seasonally adjusted decrease by 27,000 persons (–0.1%) on February.

While Deflation Dangers Remain

German producer prices fell for the first time in five years in March, suggesting that the deflation risks are increasing in Europe’s largest economy. Prices were down 0.5 percent from a year earlier following an annual 0.9 percent gain in February, according to data from the Federal Statistics Office. That’s the first annual decline since February 2004 and the biggest drop since September 2002.





Plenty More Downside To Come


Perhaps the worst casualty of all this will be German public finances. German tax revenue for 2009 is now projected to decline by more than an additional 300 billion euros as compared with previous estimates. Germany’s finance minster Peer Steinbruck is reportedly pretty depressed by the estimate, since it makes him the finance minister who presided over the highest borrowing requirement in history (as opposed to the finance minister who balanced the budget, which is what he set out to do). The economics minister, meanwhile, said that the loss in tax revenues was no reason not to cut taxes. The EU Commission now forecast Germany will have a deficit of 3.9% of GDP this year and 5.9% in 2010. As a result gross government debt is projected to climb from 65.9% of GDP in 2008 to 73.4% in 2009 and 78.7% in 2010.

Italian GDP Falls An Annualised 9.6% In The First Three Months Of 2009

Italy's recession deepened at the start of 2009, with first-quarter gross domestic product falling to its worst level since at least 1980, confirming the impression that Europe's fourth-largest economy is now headed for its worst downturn since World War II. Preliminary data from the national statistics office (Istat) show that Italian GDP fell 2.4% in the first quarter when compared with the last quarter of 2008. This follows a downwardly revised 2.1% contraction in the fourth quarter of last year. Annualised this means a 9.6% contraction rate during the three months, which is very high indeed.

Year on year GDP fell by 5.9%, which was also the sharpest drop since Istat's most recent data series starts in 1980 - or for at lest 29 years. The contraction was even worse than analysts were predicting, with the consensus having been for a 1.8% drop on the quarter and a 5% one on the year.

According to ISTAT, even if GDP stays flat for the remaining three quarters of the year, 2009 GDP will contract by 4.6%. According to my rough calculations, Italy's GDP was on about the same level this quarter as it was in the first three months of 2005, and from here we are travelling back in time.

But GDP is not remaining flat, even if the pace of contraction seems to have slowed in the present quarter.

PMIs Show Continuing Contraction - Although The Rate Eased In April

Italy continued to register the steepest overall fall in retail sales in the Eurozone in April according to the Bloomberg Retail PMI. The month-on-month sales index did however rise from 41.9 in March to 46.8 giving the slowest rate of decline since October 2007. Retail sales have now fallen for 26 months consecutively according to survey data.



Manufacturing Output Falls


Italy's manufacturing business shrank at its slowest rate for six months in April, with the latest Markit/ADACI survey producing a headline PMI reading of 37.2 - significantly above March's record low of 34.6 and beating the consensus forecast of 36.5.



In addition other recent data suggest that the lowest point may have been past with business confidence improving in April (following 10 consecutive monthly falls), and consumer morale hitting its highest level in 16 months. However Markit reported that about 40 percent of companies in the survey reported new order levels continued to fall during the month, even though at the slowest rate of decline in seven months. Output fell at its slowest rate since October, with the sub-index jumping to 35.9 in April from 32.8 in March. Overseas orders, even though they fell less sharply in April, still clocked up their 14th successive month of decline, with Markit noting that demand was particularly weak from Eastern Europe and Russia.

And job losses in Italy's manufacturing sector showed no signs of letting up and were running at the second fastest rate in almost 12 years of data collection following the record low hit by the employment index in March.

However, saying that the "darkest hour" in this contraction may be over is not the same thing as saying that recovery is anywhere in sight. Italy's manufacturing PMI has now not indicated growth since February 2008 and forecasts generally expect the economy to contract by around four percent this year, making for two straight years of continuous contraction for the first time since World War Two. Indeed, the Organisation for Economic Cooperation and Development has even already pencilled in a potential further contraction for 2010, which if realised will mean Italy's economy will have been shrinking for an almost unprecedented 3 years continuously.


As Does Services

Italian service sector activity contracted for the 17th consecutive month in April although at the slowest rate for six months. The Markit/ADACI Purchasing Managers' Index rose to 42.0 from 39.1 in March, but still is not that far above the record low of 37.9 recorded in February. Activity has now been stick below the 50 mark that separates growth from contraction since November 2007.

The survey showed new business shrinking for the eighteenth straight month in April, though the rate of decline eased for the second month running, while expectations of business in a year's time rose to an eight-month high. As elsewhere, while optimism is rising Markit did point to record job losses as a likely on consumer spending looking ahead, making hopes of a swift recovery extremely premature. The employment sub-index fell to 44.0 from 44.6, as firms cut jobs at a survey record rate in response to the ongoing loss of business. The survey is thus consistent with other recent indicators that have pointed to an economy still mired in the deep recession that began in spring of last year, but with some grounds for thinking that the lowest point may now have been passed.

Deflationary pressure remained evident with service firms cutting their prices for the seventh month running and at the fastest rate in the survey's history in response to weak demand, while input prices showed no monthly increase for the first time since the survey began. The Italian government slashed its economic forecasts last week, and now project gross domestic product to fall by 4.2 percent this year following last year's 1.0 percent decline. The International Monetary Fund is more pessimistic, forecasting a 4.4 percent fall this year and a further drop of 0.4 percent in 2010. Italy thus now possibly faces three years of economic contraction one after the other although previously the country had not posted two consecutive years of falling GDP in its entire post-war history.

Business and Consumer Confidence Rebound Slightly

Italian consumer confidence rebounded slightly in April and reached its highest level since December 2007 as the lure of slowing inflation seemed to offset concerns about rising unemployment. The Isae Institute’s consumer confidence index rose to 104.9 from 99.8 in March.


Italian business confidence also rose as companies saw signs of an increase in orders of goods and services following the sighting of green sprouts everywhere except under our noses. The Isae Institute’s business confidence index climbed to 64.2 from a revised 60.9 in March.




Industrial Output


Industrial output simply declined and declines, and fell in March for an 11th consecutive month. Output dropped a seasonally adjusted 4.6 percent from February, when it fell a revised 4.6 percent, according to data from the national statistics office. From a year earlier, adjusted production fell 23.8 percent. Fiat has laid off about half of its 78,000 national workforce in using temporary state-subsidized programs. Sales of their cars fell 16 percent in Italy in the first quarter, according to data from the trade association ANFIA.




Exports Remain Very Weak

Italy's trade deficit increased dramatically to 837 million euros in February, almost double the 449 million euros recorded in the same month in 2008. Istat said a fall in demand was recorded in all sectors, but the automobile sector was particularly hard hit with a fall in exports of 46 percent. Trade in the chemical sector was down 29.5 percent, electrical goods were down 27.3 percent and exports of other manufactured goods fell by 22.7 percent.



Imports were down by 25.3 percent at 24.3 billion euros while exports were down by 23.7 percent at 23.5 billion euros. The results, however, were slightly better than in January, when imports were 23.4 billion euros and exports 19.8 billion euros. This was effectively the worst decline in exports since these statistics were first compiled by ISTAT in 1993.




No End To The Recession In Sight
Italy effectively entered recession in third quarter of 2008, and the economy now looks bound to shrink the most in more than half a century this year. The International Monetary Fund forecast on April 22 that the jobless rate will reach 8.9 percent this year and 10.5 percent in 2010. At the same time, Italian inflation has been slowing and hit a record low of 1.1 % in March, so if the contraction continues the deflation threat is real and present.

According to the latest EU Commission forecast Italy’s gross domestic product will fall this year by 4.4 percent, more than twice the 2 percent it predicted three months ago. This is bound to have a substantial impact on government debt, and the Italian government already accepts that the budget deficit will rise this year and breach the European Union limit of 3 percent of GDP. Government spending climbed 21 percent in the first quarter from a year earlier, while revenue fell 4.8 percent, the Bank of Italy said on May 13. The EU Commission forecast a deficit of 4.5% of GDP this year and 4.8% in 2010. As a result gross government debt is projected to climb from 105.8% of GDP in 2008 to 113% in 2009 and 116.1% in 2010. A grim picture, and no easy solutions.