Friday 23 August 2019

Italy emerges as Europe's unlikely growth engine

(stock image)
(stock image)

Jamie McGeever

Germany and Spain have been the drivers of eurozone growth over the last couple of years, but it's France and Italy steering the "Euroboom" into 2018.

Given their history, particularly Italy's, there are doubts over how long this will last. Calls for "structural" reforms and labour market liberalisation are as shrill as ever and progress on those glacial. But signs are encouraging.

Fred Ducrozet at Pictet Asset Management notes that the latest leg of this "robust and broad-based" recovery has been increasingly driven by laggard countries "catching up with the rest of the pack."

He's crunched the numbers and unsurprisingly finds that Italy is punching well below its weight. Based on end-2016 figures, Italy accounts for 15.5pc of total eurozone economic output. But it has accounted for only 4.2pc of cumulative growth since the euro's inception in 1999, almost four times lower than its weighting.

Yet since Q2 2013, Italy's cumulative contribution to overall eurozone growth stands at 7.5pc, according to Ducrozet. If you start at Q1 last year, that rises to 9.6pc.

Based on end-2016 figures, France's share of the eurozone economy is 20.6pc. Since 1999 France's contribution to eurozone growth has been almost exactly the same as its weighting, at 21.1pc.

That falls sharply to 13pc when using Q2 2013 as the starting point, reflecting just how hard France's economy was hit by the global financial crisis and subsequent euro crises. But since Q1 last year, that has risen to 14.2pc.

Ducrozet's analysis shows that both countries are moving in the right direction, albeit slowly. Even though they're both coming up from a low base, they're narrowing the gap between actual and potential growth.

Erik Nielsen at Unicredit notes that, contrary to perceived wisdom, Italy's low trend growth rate of 1-1.5pc is sufficient to keep the country comfortably servicing its large debt load of around 130pc of GDP.

Eurozone investments have turned in one of their best years since the single currency was born in 1999, confounding many who had bet on the bloc to be the disaster play of 2017.

The most recent figures suggest the economic upswing is continuing, even accelerating. Italy's much maligned manufacturing sector expanded at its fastest pace in over six and a half years in October, and the biggest upward revision of all euro zone purchasing managers data was to the French index.

Italy's got a long way to go. It is by far the worst-performing economy in the G7 industrialized nations, being the only one yet to return to its pre-crisis size - a lost decade and counting.

But, the value of bad loans on Italian bank books has fallen to its lowest in over three years. These glimmers of hope in the Italian banking system - only glimmers - helped fuel an impressive rebound in the country's stock market. And last month, Standard & Poor's unexpectedly upgraded Italy's sovereign credit rating, the first upgrade for Italy in at least three decades. (Reuters)

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