| Italy: Disappointing October IP suggests downside risks to Q4 GDP growth forecasts |
| 07.12.11 12:57 | |
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Industrial production disappointed in October. On the month, it declined -0.9% m/m below our (0.0% m/m) and consensus (-0.3% m/m) forecasts. The decline came after a sharp contraction of -4.6% m/m in September, a print which was upwardly revised from -4.8% m/m previously estimated by ISTAT. The October index was 2.8% below the Q3 level, when IP edged down -0.4% q/q. Currently, we expect Italian IP to have contracted 2.6% q/q in Q4, making the weakest print since Mar 09, when it plunged 11.1% q/q. The latest IP and business confidence data into real GDP growth suggest a very weak end of the year for Italian growth. We remain of the view that real GDP growth declined 0.2% q/q in Q3*, while we now see downside risks to our forecast that GDP growth in Q4 was -0.3% q/q. As our GDP indicator suggests (please see RHS chart below), Italian GDP is likely to have edged down -0.17% q/q in Q3 (in line with our forecast of -0.2% q/q), and to have contracted -0.84% q/q in Q4, compared with our current expectation of -0.33% q/q. To some extent, latest IP data and prospects for the next few months pictured by business confidence data (in particular PMIs), reinforce our view that Italy needs to do more raise its potential GDP growth. From a value-added perspective, Italy seems to have dangerously shifted onto a lower industrial production trend, suggesting that it has not recovered from the loss experienced between Mar 08 and Jun 09, when it contracted 24.3% (see LHS chart below). Since then, we calculate that Italy's IP had only recovered about 10%. In this context, we welcome the efforts made by the government to support GDP growth. That said, we think that more needs to be done in order to increase the competitiveness of the economy. In our view, fiscal devaluation, in particular through lower labour costs would probably be the more effective way of achieving such a result. On this point, the government led by PM Monti said it will deliver a comprehensive labour market reform in the next few weeks. source: BarCap |
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