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Economy in Brief

Italian IP Remains on a Winning Streak – The Icarus Factor?
by Robert Brusca  June 10, 2022

Italian manufacturing industrial production rose by 1.5% in April on a strong gain in the intermediate sector of 2% and a solid gain in the consumer sector of 1.6% while capital goods output remained flat month-to-month. Over the last three months among these three sectors, there was only one month in which a sector’s output declined - that was a 0.6% decline in intermediate goods output in March.

Recent strength meets longer lasting breadth
This strength is part of an ongoing process in Italy where 12-month output is up by 3.7%, six-month output is up at a 6.2% annual rate, and three-month output is up at a very strong 25.5% annual rate. Industrial output in Italy is accelerating across these horizons and what's more it is accelerating in each of its major sectors: consumer goods, capital goods, and intermediate goods.

Strength in growth no matter how you cut it
Over 12 months the strongest sector is consumer goods on a gain of 9.7% with capital goods the weakest on a gain of just 0.5%. Skipping ahead to three-months, the strongest sector is consumer goods on a gain of 38.1% at an annual rate, followed by intermediate goods at a 21.6% annual rate followed by capital goods at 13.6%. These trends show that Italian output has been strong in the current month, in the last few months, and has been accelerating over the last year across all three major industrial sectors. This is a very strong showing.

Adequate to very strong standings
If we rank the industrial sectors based on year-over-year growth rates, Italian performance ranges between adequate to strong. At 3.7%, manufacturing output year-over-year has an 80th percentile ranking on data back to 2000. That's a top 20% position, which is strong. Consumer goods output, running at 9.7% over 12 months, has a 97.7 percentile standing and that is excellent and extremely strong. Intermediate goods output, with a 2.0% increase over 12 months, has a 66.7 percentile standing; that's a top one-third ranking for the sector and that is a solid performance. However, capital goods show an increase of just 0.5% over 12 months; that performance has a ranking of 48.9% which puts it just about one-percentile point below its median on this timeline. Growth at the median is adequate but no more than that. So, when we evaluate the growth rates for Italian production across sectors, the bottom line is that growth by sector ranges between adequate to quite strong.

Great results but are they sustainable?
The second part to the story about ranking is that, of course, the three-month growth rates are going to rank a lot higher. And so will the six-month growth rates. Italian industrial production looks very-solid over 12 months and then, because of the increasing growth rates, it's looking stronger and stronger over these shorter periods. The question is whether Italy will be able to sustain this kind of increase in output given the challenges in Europe.

Other metrics are not so glowing...
Manufacturing PMI: The Italian manufacturing PMI (S&P Global) has been slipping during this period. It has declined from a 12-month average of 59.8 over 12 months to average 58.6 over six months to a 56.2 average over three months. The index has further slipped from February to March to April although the April level for the manufacturing PMI is still a solid 54.5 reading. What we see in looking at the PMI data is that the trends are opposite to those that we get from looking at the performance of industrial production outright. And that could be something to bear in mind when considering trend and future performance.

EU and Istat surveys: Other indicators for Italy like the EU industrial confidence index, current orders from Istat and the Istat outlook for production also are less upbeat. These surveys show withering responses from 12-months to six-months to three-months but fail to do so sequentially – they do so only indicatively. However, the levels of the indexes generally are still strong: the rank standing of the EU industrial confidence index is strong at its 87.5 percentile. The Istat current orders reading has a strong 95.1 percentile standing. However, the outlook for production from Istat has only a 30.4 percentile standing, a standing that has been weaker only about 30% of the time. That is worrisome.

Italy: a mixed picture despite clear strength
Italy is an interesting case of showing some quite divergent trends between what industrial production actually is doing and what some of the indicators prescribe as their analysis. However, the outlook from Istat is disturbing with a standing that's in the bottom 30% of what we've seen since early-2000.

Surveys introduce the Icarus factor
And, of course, Italy is in the same soup as the rest of Europe: the war in Ukraine rages on. It creates spin off problems for supply chains and a threat to Italy’s oil supplies. There still is the virus circulating. Italy is under the umbrella of the European Central Bank which will be raising interest rates soon - or so we are told… These dynamics point to a weaker future despite the undeniably impressive performance of actual production and its rising momentum. The surveys and the survey outlook would seem to be capturing something that is out there lying-in wait for the Italian economy that will slow it down. If that happens, it will put Italy more on the same footing as other countries in Europe.

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