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Economy in Brief

Record Drop in Italian IP; IP Plummets 30.6% in One Month
by Robert Brusca  May 11, 2020

IP flatlines then heads straight for Dante's inferno
Italy's Industrial production fell sharply in March as Europe is gripped in early-May by reopening fever. Of course, the March report on IP lags. May is 'real time' so these events are sequential and separated by April as well. But just as a number of European countries are starting to unwind restrictions, some of the worst news of the coronavirus is hitting 'the tape.' That gives some and a bad feeling in the pit of their stomach. It also makes it hard to be able to assess just what markets are expecting and what they are discounting for the future.

The rhythm of financial markets
Paradoxically as the bad news is released and as authorities begin to loosen restrictions, markets that had stabilized and rallied are getting cold feet about the prospect of a second wave of infections. This is a good example of market behavior and what we call 'leads and lags' as the data with their bad signal are lagging; in real time things are getting better as restrictions are being lessened. And as a result, markets are onto worrying about what's next and that would be a second wave. If these were three instrumentalists, they would not be able to play in the same band. One is always behind the beat, another is always on the beat and the last one is always ahead of the beat. Such is the rhythm of financial markets where the beat goes on...

Italy's predicament
In Italy, the industrial sector is hard hit. All three main sectors are dropping at rates close to or in excess of 30% month-to-month. Over three months, the annualized rates of growth for the declines in the three sectors range from -69% to -84%. The ranges are reduced to -46% to -62% over six months and to -28% to -39% over 12 months. And the headline itself is down by 31.3% over 12 months. So these are enormous declines month-to-month as well as year-over-year. These are not declines coming on the heels of strength. These are declines coming on the heels of what has been relatively-flat-to-slightly-eroding performance over the past year.

Italy's manufacturing PMI has been falling and is down by nearly 10% over 12 months. Its level in March is at 40.3, but it has averaged readings below 50 showing modest contraction over three-months, six-months and 12-months.

Europe: beginning to reopen
Europe is letting up on restrictions gradually, but that is not leading to the celebratory climate you might expect. Actually many are celebrating, but today the markets are not among the party revelers. In Germany, some are protesting the slow pace of reopening. In the U.K., Boris Johnson is going to repeat his plan because the presentation he gave was more confusing than enlightening. France is lifting restrictions; Spain is easing restrictions. Czechoslovakia, importantly, is opening beer gardens. Skol! That is a toast from a Scandinavian tourist in a Czech beer garden.

News on coronavirus continues to emerge. In the U.K., reports show that low skilled workers were more likely to be killed by the virus (Source here). The virus is known to kill a disproportionate number of the old. In the U.S., studies show that black people die disproportionately too. More detailed data show that the correlation is really less with age per se and more with the presence of other debilitating health issues. Neil Pearce, professor of epidemiology and biostatistics at the London School of Hygiene & Tropical Medicine, told the Science Media Center that the analysis showed COVID-19 is "largely an occupational disease" in the working age population. While this point may stand up, until these workers' medical histories are vetted, the detailed medical data from New York demonstrate another possibility. That data set shows that few heathy workers of any age (healthy --> those without other underlying medical conditions) have been killed by the virus. It is entirely possible that working class people also tend to have other medical issues. The U.K. study did control for age but not for medical history which increasingly seems even more important.

The virus stops for no man or woman
As time passes, the virus continues to wend its way through different populations at different speeds. Russia now has the third highest count of cases. Despite a still-spreading infection, India is planning to restart railways. Some are suggesting that the new mode of commuting in Europe could become the bicycle as people are wary of traveling in tight quarters on mass transit.

With reopening in progress, fears of a second wave are rising. China is seeing a new outbreak of infections and so is South Korea. Singapore, that handled its original infectious outbreak so well, has had more of a problem with disease spreading in its migrant population; it logged 486 new cases today.

Beyond corona...
Meanwhile, the world is not just about coronavirus news. Democracy protests have been restarted in Hong Kong. China is berating New Zealand for its support (recognition) of Taiwan in WHO. EU-U.K. talks are being extended. In the U.S., Donald Trump is considering having the federal government defray the states' coronavirus costs.

Corona as a diversion or an opportunity?
Of course, domestic politics and geopolitics do not mix well with an on-the-loose virus. But what we learn is that while the virus can stop an economy in its tracks, nothing stops a politician or a fervent political ideology from pursuing its appointed route. In the U.S. where Republicans are fighting against vote-by-mail, the huge Democrat controlled state of California (stand-alone it would rank fifth globally just ahead of India and behind Germany) is adopting full –on vote by mail. The old political fights are still engaged. No matter why China will continue to repress and try to expunge any international mention of Taiwan. Politics in the U.S. apparently will remain bitterly divided to the end (at least until elections in November then we will have to see what form that will take).

While the virus seems to steam-roll everything in its path, it is clear that here are 'ambulance chasers' out there who will zoom into the wake of the virus and try to ride its chaos for their own objectives. Politicking in the age of coronavirus is truly disgusting. But it is also a reality. I guess the old expression 'never let a good crisis go to waste' is true.

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