CHART OF THE WEEK
Italy’s latest figures indicate a sharp slowdown. Growth came out at just 0.1% on an annualised basis for the third quarter, which is its lowest level since the start of 2015. Only at the end of November will a detailed breakdown reveal which components and sectors are under most pressure. However, October’s PMI1 indices suggest that the downturn is likely to persist.
The composite PMI fell three points, slipping below 50 to 49.3. Manufacturing and services suffered equally. Such levels are consistent with a contraction in growth.
OUR ANALYSIS
If these numbers are confirmed in the months ahead, then Italy’s government will have an even trickier job achieving its 2019 deficit-to-GDP target of 2.4%. The target relies on a growth rate of around 1.5%, of which 0.6% is set to come from measures previously announced by the government.
The growth slowdown is currently due more to rising uncertainty than to higher financing costs: ECB3 data from the end of September do not yet indicate any sharp rise in corporate funding rates. However, if sovereign yields continue on their current path, then the cost of credit will indeed rise in the months ahead.
The European Commission has just published its own predictions, which depict a deficit of 2.9% against a growth of 1.2% for 2019. This deficit would exceed 3.0% in 2020. It could therefore be ready to launch an excessive deficit procedure against Italy. Economic conditions taking a turn for the worse would further complicate the task of the Italian government, seeing it has aimed to cap the deficit at 2.4%.
PMI (1): Purchasing Managers’ Index, an indicator of economic health for manufacturing and service sectors
GDP (2): main economic index measuring the economic production inside a given country
ECB (3): European Central Bank
The opinion expressed above is dated November 7th 2018, and liable to change.
This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS.
