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Economy in Brief

Italian Retail Sales Crawl Ahead
by Robert Brusca  July 7, 2021

Retail sales in Italy rose by 0.2% in May, a paltry gain in the week, after a 0.1% drop in April. Italy continues to make solid progress against the virus as virus-related deaths and infections are down sharply; total daily nationwide infections are down to 907 as of July 6. But retail sales are up only at a 1.6% annual rate over the last three months as growth metrics have sputtered. There are gains on the order of 12% annualized over six months and 12 months. In the quarter-to-date, sales are still doing quite well at a 10.6% annual rate. Amid the mixed signals of strong QTD (quarter-to-date) growth and weak three-month growth, Italian sales are below what they were in January 2020 before the virus struck.

Looking for a good metric to evaluate sales
The longer term Italian growth rates are unreliable for the same reasons everyone else’s: annual data are unreliable; comparing sales growth to the year ago period when the virus was a huge factor and economic activity was restricted. The period presents a poor base from which to construct growth metrics. But Italy’s short-term growth rates are unreliable for similar reasons. The Italian economy experienced late stage virus issues that have had retail sales running hot and cold more recently, too. In November Italian sales volumes fell by 6.9% month-to-month; they rose by 2.2% the next month then fell by 3.6% in January. In February sales popped by 6.7% lifting sales in the middle of Q1 also giving Q2 sales a sizeable base lift which is what we see in the current data. Sales.in March, April, and May of 2021 have been better behaved but largely weak rising by 0.4% in March followed by a 0.3% drop in April and a 0.4% gain in May.

Still lagging pre-virus levels
All this volatility has left Italian real sales (sales volumes) rising at a 2% pace over three months and at an 11.6% pace in the quarter-to-date (two months into Q2). Real sales also are rising at double-digit rates over six months and 12 months; yet, they are 1.8% lower than they were January 2020.

Obviously, Italy is still sputtering and trying to deal with the impact of the virus and with the adversity of a good deal of lost tourism.

Consumer confidence is on a tear
Consumer confidence is coming back as it rose by 8.1% in May. And confidence strikes some sizeable growth rates over three months, six months and 12 months. Despite all this strength, confidence is still 1.3% below where it stood in January 2020 before the virus struck. Still, confidence is on a streak of strength having also risen very strongly in May. Maybe Italy is finally putting something constructive in pace.

Manufacturing also lags
Globally it is the manufacturing sector that has rebounded the best. In Italy the industrial production data are available through April. As of April, manufacturing had posted a strong gain and was riding a three-month annualized growth rate of 8.9% that is impressive. In the quarter-to-date (early in the quarter; as of April), growth is at an annualized pace of 6.2%. Even so IP is 0.7% below its level of January 2020 just before the virus struck.

Italian exports and imports perform
What appear to have revived the most are Italian exports and imports. Despite the lagging manufacturing performance in Italy, both exports and imports are above their January 2020 levels with exports the relative stronger flow. Exports are up by 5.8% Since January 2020 while imports are up by 3.6%. Imports in Italy are stronger than retail sales on the timeline from January 2020. A number of countries have found that imports have rebounded faster than output with the result that domestic demand, having revived, is not keeping its stimulus for the domestic economy but is letting it leak out to fuel growth in its trade partners. While that is true for Italy, in another sense it is also false since Italy is a net beneficiary of trade as it is experiencing faster export growth than import growth. Domestic output is strong enough to drive exports faster than imports even if imports are rushing in faster than domestic demand is rising to satisfy consumption. Italy is a bit of an unusual case in these respects.

The outlook
The outlook is still uncertain. While Italy appears to have bottled up the virus, the feared D-variant is strongly circulating in Europe. And while it is highly infectious, it does not appear to be very lethal as a number of months of D-variant data from the U.K. show. In the time that the D-variant took off in the U.K. to become dominant there, hospitalizations fell dramatically to a low level. Still, a lot of what the virus does to an economy has to do with how people perceive it and the D-variant is perceived as a threat.

Policy changes ahead
Apart from that, while Christine Lagarde has remained focused on getting growth established, some ECB members from Germany and Austria and starting to register a desire to begin pulling back on some of the monetary stimulus. Markets already are focused on the prospect of a ‘taper-tantrum’ in the U.S. should the Fed begin to cut back its securities purchases – something that apparently is now under discussion. The same sort of phenomenon will be at work in the EMU when the ECB begins to make its shift. The problem is that there is no stealth way for central banks to gradually undo what they have done. And markets are always trying to get a step ahead of the central banks. When the gears grind the other way to remove stimulus, markets can expedite the process faster than what central banks may desire. And while central bankers may eventually be able to sort out and fine tune their message, the early stages of a policy change are usually a bit of a free for all as opinions and forecasts run wild for a spell.

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