Italian IP Is Set Back in December

Italian IP was set back in December, shedding about half its gain from November that was itself a rebound from a decline in October. The headline for IP now shows an erratic recent pattern across months and sequential growth rates over 12 months to six months to three months that show steady deceleration. Moreover, the decelerating patterns permeate the three main sectors of IP: consumer products, capital goods and intermediate goods. Italy's slowdown is broad-based across manufacturing (although the transportation sector bucks the trend on strong growth in output over the last three-months- both for three months on balance as well as for each of those three months).

The chart lays out a slightly different path and shows how Covid has dominated the recent behavior in IP, crushing it in April 2020 and then that deep depression in the timeseries laid the groundwork for the spike in April 2021. Emerging from all these distortions, IP has since settled down. IP, often a volatile series in the best of times, has logged increases month-to-month in eight of the last 13 months with one month showing no change in output. That puts the monthly expansion contraction ratio at 2:1. Over that stretch, the average monthly percentage change in output has been 0.4% which is quite good since IP data are expressed in real terms.

However, three of those monthly drops have come in the last five months as well as one month of unchanged output. There has been only once increase in five months, in November. In fact, November saw the first increase in output since June 2021. Clearly momentum is authentically being lost.

In the quarter-to-date (QTD – which is now a completed Q4 reading), output is falling for the headline and for all sectors except consumer goods. The consumer goods rebound may reflect catch up more than strength; consumer goods and capital goods are the only major sectors with output in January 2022 still lower than it was in January 2020. However, the consumer goods sector has been strong. Consumer goods is the only sector that despite slowing sequentially logs no negative results and posts the strongest gain of any sector over six months and 12 months as well as over three months.

Assessing output growth over 12 months using historic results back to January 2000, year-on-year manufacturing trends rank strongly. The headline is at 83.7% and consumer goods stand at their 97.3 percentile. Capital goods, at their 51.1 percentile, are barely above their historic median (that occurs at a 50% ranking). Intermediate goods stand at their 70.5 percentile. Manufacturing growth is doing well over 12 months, but it is decelerating.

These ratings on actual output reinforce the message from surveys on industry and business in Italy for the same span. The EU industrial confidence reading has been higher on this timeline less than 3% of the time. Current orders for Istat have been stronger less than one-half of one percent of the time. The Istat outlook has been stronger only about 15% of the time. Surveys reinforce the current IP readings on strength.

The three indicators at the table bottom show very strong gains over 12 months but revert to much smaller gains over six months and three months. That is not surprising since these rankings presented here are for these indicators as levels and levels have not changed very much over three months or six months. The surveys show levels about as high as they have ever been (see rankings), a least for two series. It is natural that when a diffusion survey approaches such a height its gains slow.

The message here is that Italian industry still has strong output and confidence, but that momentum has been ebbing. There is no pessimism here. There may still be lingering concern about what the virus will allow going forward, but sector diagnostics remain upbeat.